CFA® Level 2 Equity Practice Questions
The free CFA® Level 2 questions that deal with equity, with answers and explanations. The full bank and the timed practice test cover every topic the exam asks about.
Question #4
A company's return on equity (ROE) is 15%, and its debt-to-equity ratio is 1. A financial analyst using the DuPont analysis wants to determine the net profit margin. What is it if the asset turnover is 2?
Correct answer: A
Explanation
ROE = Net profit margin _ Asset turnover _ Equity multiplier. Rearranging gives Net profit margin = ROE / (Asset turnover _ Equity multiplier).
Question #6
A firm plans to issue new equity to finance a project that is expected to generate cash flows of $500,000 per year for 5 years. If the cost of equity is 8%, what is the value of the project?
Correct answer: D
Explanation
Using the present value of annuity formula, the value of the project = Cash Flow _ [(1 - (1 + r)^-t) / r] with r as the cost of equity and t as years of cash flow.
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