Level 2 Mock Exam Question and Answers 2014

Level 2 Mock Exam Question and Answers 2014 Level 2 Mock Exam Question and Answers 2014 Level 2 Mock Exam Question and Answers 2014 Level 2 Mock Exam Question and Answers 2014 Level 2 Mock Exam Question and Answers 2014 Level 2 Mock Exam Question and Answers 2014 Level 2 Mock Exam Question and Answers 2014

Mock Exam – AM Answers Block 1: LaCompte Question of Even if LeCompte discloses the cost of her attendance she may still not be permitted to take the trip depending upon her company's policies In addition, the disclosure in this case is not enough to avoid a potential violation of Standard I(B) relating to independence and objectivity By allowing the corporate issuer to pay for her travel expenses her judgment could be compromised It is more appropriate for LeCompte to decline the invitation or have her company pay all costs for the trip in order to avoid any conflict or appearance of conflict 2014 CFA Level II “Guidance for Standards I–VII,” CFA Institute Standard I(B) Question of LeCompte violated Requirement 6, Relationships with Subject Companies, by sharing the full research report with NanoMem Sharing any section of a research report that might communicate the analyst's proposed recommendation, rating, or price target is prohibited by the Research Objectivity Standards Sharing historical factual information on the other hand is not a violation 2014 CFA Level II “CFA Institute Research Objectivity Standards,” CFA Institute Section Question of Research Objectivity Requirement 5, Research Analyst Compensation, recommends analyst's compensation be based on the accuracy of recommendations over time In addition, compensation should not be directly linked to investment banking or other finance activities, which it is not in this case LeCompte's bonus is based on the group's overall performance and is not specific to the research support she provides to various divisions 2014 CFA Level II “CFA Institute Research Objectivity Standards,” CFA Institute Section Mock Exam – AM Answers Question of LeCompte provided all the recommended disclosures relating to potential conflicts of interest with respect to UniFlash She should have disclosed the "benefit received" from NanoMem concerning the trip she took, as well as her small equity position in NanoMem as required by Research Objectivity Requirement 2, Public Appearances 2014 CFA Level II “CFA Institute Research Objectivity Standards,” CFA Institute Section 2.0 Question of The recommended procedures for compliance with the Research Objectivity Requirement 11, Rating System, states that firms should prohibit covered employees from communicating a rating or recommendation different from the current published rating or recommendation 2014 CFA Level II “CFA Institute Research Objectivity Standards,” CFA Institute Section Question of According to the CFA Institute Standards I(B), and V(A), members and candidates must exercise diligence, independence, objectivity, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions Changing a written recommendation to what a subject company desires is not acting diligently, independently, objectively, and/or thoroughly and the analyst should immediately revise her recommendation to express her stated opinion of the company 2014 CFA Level II “Guidance for Standards I-VII,” CFA Institute Standard I(B), Standard V(A) Mock Exam – AM Answers Block 2: Scott Question of Economic income = Change in market value plus the after-tax cash flow Market value = Present value of future expected after-tax cash flows Beginning market value, at beginning of Year (assuming end-of-year cash flows): Ending market value at the end of Year 3: Economic profit = (292,939 – 382,712) + 147,180 = 57,407 2014 CFA Level II "Capital Budgeting," by John D Stowe and Jacques R Gagne Section 8.2 Question of Operating income before tax– Interest = Taxable income: $102,750 – ($300,000 × 0.12) = $66,750 Accounting income or net income = Taxable income × (1 – Tax rate) $66,750 × (1 – 0.40) = $40,050 2014 CFA Level II "Capital Budgeting," by John D Stowe and Jacques R Gagne Section 8.2 Mock Exam – AM Answers Question of Ludlow's suggestion of considering alternate economic environments is an example of scenario analysis 2014 CFA Level II "Capital Budgeting," by John D Stowe and Jacques R Gagne Section 7.3.2 Question of Because the schedule for the first year is equivalent to straight-line depreciation (1/5 = 20%), the after-tax operating cash flow does not change under straight line or MACRS accelerated depreciation 2014 CFA Level II "Capital Budgeting," by John D Stowe and Jacques R Gagne Section 6.1 Question of Ludlow's suggestion is an example of economic profit: EBIT × (1 – tax rate) – $WACC EBIT is earnings before interest and taxes 2014 CFA Level II "Capital Budgeting," by John D Stowe and Jacques R Gagne Section 8.3.1 Question of The competing projects are mutually exclusive, which means that only one of the two positive NPV projects can be accepted The choice of which project to accept is based on choosing the project with either (1) the highest equivalent annual annuity (EAA) or (2) the highest value based on the least common multiple of lives (LCML) approach The three-year project should be chosen using either approach as shown in the following EAA for three-year project: Mock Exam – AM Answers NPV × Present Value Annuity Factor (three years at 15%) EAA = 128,146/2.2832 = 56,126 EAA for five-year project: NPV × Present Value Annuity Factor (five years at 15%) EAA = 183,109/3.3522=54,624 The three-year project is preferred because it has a higher EAA LCML: The least common multiple, given and 5, is 15 Compare the NPV of each project, assuming each project is repeated for 15 years NPV (three-year project, 15 years): NPV (five-year project, 15 years): The three-year project is preferred because the NPV over 15 years is higher 2014 CFA Level II "Capital Budgeting," by John D Stowe and Jacques R Gagne Sections 7.1.1– 7.1.2 Mock Exam – AM Answers Block 3: Daltonia Question of The components of growth can be determined using Solow’s growth accounting equation: ΔY/Y = ΔA/A + αΔK/K + (1 − α)ΔL/L where: ΔY/Y = GDP percentage growth ΔA/A = percentage growth from total factor productivity (TFP) ΔK/K = percentage growth in capital ΔL/L = percentage growth in labor α = share of income paid to capital factor – α = share of income paid to labor factor, also the elasticity of output with respect to labor TFP = Labor productivity growth – Growth in capital deepening = 1.7 – 2.3 = –0.6, which is given in Exhibit Also given, – α = 0.65 and α = 0.35 GDP growth = ΔY/Y = 3.75 ΔA/A = growth due to TFP αΔK/K = growth due to capital (1 − α)ΔL/L = growth due to labor Arising from the total of components below: −0.6 + 2.13 = (0.35) × 6.1 + 2.21 = (0.65) × 3.4 3.75 GDP growth Growth due to labor of 2.21% is greater than the growth due to capital or TFP 2014 CFA Level II “Economic Growth and the Investment Decision,” by Paul Kutasovic Sections 4.2-4.3 Question of Pamuk’s conclusion is consistent with the endogenous growth model In the endogenous growth model, the economy does not reach a steady growth rate equal to the growth of labor plus an exogenous rate of labor productivity growth Instead, saving and investment decisions can generate self-sustaining growth at a permanently higher rate This situation is in sharp contrast to the neoclassical model, in which only a transitory increase in growth above the steady state is possible The reason for this difference is because of the externalities on R&D, diminishing marginal returns to capital not set in 2014 CFA Level II “Economic Growth and the Investment Decision,” by Paul Kutasovic Section 5.3 Mock Exam – AM Answers Question of Birol’s statement based on Mundell–Fleming model is inaccurate because restrictive (not expansionary) fiscal policy, along with expansionary monetary policy, would lead to capital outflows and cause the currency to depreciate assuming high capital mobility 2014 CFA Level II “Currency Exchange Rates: Determination and Forecasting,” by Michael R Rosenberg and William A Barker Sections 6.1, 6.2.2, 6.3 Question of Suggestion is an accurate description of a sterilized currency intervention If the currency is overvalued and inflation is a concern, a sterilized intervention is necessary Emerging market authorities would sell domestic securities to the private sector to mop up any excess liquidity created by its foreign exchange intervention activities The end result would be that the monetary base and the level of short-term interest rates would not be altered by the intervention operation 2014 CFA Level II “Currency Exchange Rates: Determination and Forecasting,” Michael R Rosenberg and William A Barker Section Question of Calculate the interbank implied cross rate for (DRN/EUR) Invert the (EUR/USD) quotes The 0.8045 bid becomes 1/0.8045 = 1.243 offer for (USD/EUR) The 0.8065 offer becomes 1/0.8065 = 1.240 bid for (USD/EUR) Determine the interbank implied cross currency quotes for (DRN/EUR) as follows: Bid: 1.205(DRN/USD) ᵡ 1.24 (USD/EUR) = 1.4942 (DRN/EUR) Offer: 1.210 (DRN/USD) ᵡ 1.243 (USD/EUR) = 1.504 (DNR/EUR) Mock Exam – AM Answers 2014 CFA Level II “Currency Exchange Rates: Determination and Forecasting,” by Michael R Rosenberg and William A Barker Section 2.1 Question of To initiate a carry trade, a European investor will borrow in the lowest interest rate currency, the euro (EUR) The cost will be 0.8% He will invest in the highest LIBOR rate currency, the DRN at 2.1% Sell Sell Invest at 2.1% DRN LIBOR: Convert to EUR at projected spot: Minus borrowing cost: 100,000×0.8%=EUR800 Ending balance = EUR101,065 Minus 100,000 beginning value = EUR1,065 profit 2014 CFA Level II “Currency Exchange Rates: Determination and Forecasting,” by Michael R Rosenberg and William A Barker Section 4.1 Mock Exam – AM Answers Block 4: Tremblay Question of The mid-market for CAD/USD is (1.2138 + 1.2259)/2 = 1.21985 The mid-market forward premium (discount) is calculated as: In this problem, we have: 2014 CFA Level II "Currency Exchange Rates: Determination and Forecasting," by Michael R Rosenberg and William A Barker Section 2.2 Question of The relative version of PPP states that the percentage change in the spot exchange rate will be completely determined by the difference between the foreign and domestic inflation rates In this case, the difference in the inflation rates is 1.90%–2.30% =–0.4% Subtracting 0.4% from the current bid gives the answer 1.2089 The calculation is 1.2138 – (0.004 × 1.2138) = 1.2089 2014 CFA Level II "Currency Exchange Rates: Determination and Forecasting," by Michael R Rosenberg and William A Barker Section 3.1.4 Mock Exam – AM Answers Question of It is cheaper to buy Canadian dollars indirectly through Brazilian reals than directly with U.S dollars This creates a triangular arbitrage opportunity: US$1,000,000 × 2.3844 = BRL2,384,400 2,384,400 × 0.5250 = C$1,251,810 C$1,251,810/1.2259 = US$1,021,135 US$1,021,135 – US$1,000,000 = US$21,135 profit 2014 CFA Level II "Currency Exchange Rates: Determination and Forecasting," by Michael R Rosenberg and William A Barker Section 2.1 Question of Baroque's comments describe the international Fisher effect The international Fisher effect states that the foreign-domestic nominal yield spread will be solely determined by the foreigndomestic expected inflation differential 2014 CFA Level II "Currency Exchange Rates: Determination and Forecasting," by Michael R Rosenberg and William A Barker Section 3.1.5 Question of Tremblay's first justification describes "club convergence." Her second justification describes a second source of convergence–imitating or adopting technology already widely used in the advanced countries Convergence is consistent with the neoclassical growth model 2014 CFA Level II "Economic Growth and the Investment Decision," by Paul Kutasovic Sections 5, 5.2.2, 5.4 ... operating assets 20 13 ($ thousands) 131, 122 ? ?21 , 122 110,000 20 12 ($ thousands) 127 ,000 ? ?25 ,000 1 02, 000 57,000 –35,000 –5,000 17,000 64,000 –40,000 –5,000 19,000 93,000 83,000 $10,000 20 14 CFA Level II... opportunity: US$1,000,000 × 2. 3844 = BRL2,384,400 2, 384,400 × 0. 525 0 = C$1 ,25 1,810 C$1 ,25 1,810/1 .22 59 = US$1, 021 ,135 US$1, 021 ,135 – US$1,000,000 = US $21 ,135 profit 20 14 CFA Level II "Currency Exchange... rate (Income taxes/EBT) 20 13 136.6 109.9 26 .7 20 12 170.0 1 32. 3 37.7 19.6% 22 .2% 20 14 CFA Level II “Multinational Operations,” by Timothy S Doupnik and Elaine Henry Section Question of Petersen interprets