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CFA® Level II Question of the Day

CFA® Level II Question of the Day

Kaplan Schweser's CFA® Question of the Day begins in October 2016 and runs through Exam Day. Below you will find the answers for our Level II Question of the Day emails.

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January 21

By Kaplan Schweser | Posted on January 21, 2017


Answer to Level II Question: B

Answer Explanation: IPOs for such firms attract large amounts of equity capital because such a firm at cash out will not have excessive debt and can potentially attract the best quality management team.  Therefore, the valuation multiple will tend to be higher than in other exit strategies.

Choice "a" is incorrect.  Secondary market sales typically occur among buyout firms or among venture capital firms rather than between such firms due to the…

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January 20

By Kaplan Schweser | Posted on January 20, 2017


Answer to Level II Question: B

Answer Explanation: In the absence of a public market, the secondary market is usually the best alternate exit strategy.  A common secondary market transaction is the sale to another buyout fund.

Choice "a" is incorrect.  Management buyouts require large amounts of leverage.  Large amounts of leverage are usually only available at a time when the financial markets are liquid.  In most cases, an initial public offering or a sale to another buyout fund…

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January 19

By Kaplan Schweser | Posted on January 19, 2017


Answer to Level II Question: C

Answer Explanation: A venture capital firm often will cap the pre-money valuation to reflect the significant uncertainty surrounding the valuation of intangible assets.

Choice "a" is incorrect.  Comparing the company to comparable publicly traded company can be useful when comparable companies exist.  In many cases comparables, however, do not exist.

Choice "b" is incorrect.  The ownership split between management and the venture capital firm is…

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January 18

By Kaplan Schweser | Posted on January 18, 2017


Answer to Level II Question: A

Answer Explanation: The post money valuation for a venture capital investment is given by the formula:

POST = PRE + I

Where PRE is the value of the company prior to the investment by the venture capital fund; I is the amount of the investment; and POST is the value of the company after the investment.

In this case, PRE = $7 million; and I = $5 million so POST = $7 million + $5 million = $12 million
The formula for ownership post investment by…

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January 17

By Kaplan Schweser | Posted on January 17, 2017


Answer to Level II Question: A

Answer Explanation: Venture capital investments will most likely take place in a company without an established product or in non-established markets.  Therefore, VC investors will primarily focus on growing the revenue stream.  Buyouts will most likely take place in a firm with established products in a strong market position.  Buyout investors will tend to focus their efforts on EBITDA growth given an assumption of stable revenues.

Choice "b" is…

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January 16

By Kaplan Schweser | Posted on January 16, 2017


Answer to Level II Question: A

Answer Explanation: Earn-outs link the acquisition price paid by the private equity firm to the company's financial performance for some period of time, generally 2 to 3 years.  Earn-outs typically apply in venture capital deals where the firm's financial performance over the specified period establishes the acquisition price for the VC firm.  Shareholders in the selling entity may want to be cashed out of their equity position, which an earn-out…

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January 15

By Kaplan Schweser | Posted on January 15, 2017


Answer to Level II Question: B

Answer Explanation: Empirical studies have shown management at private companies that formerly were public have a greater focus on the long-term, even if long-term planning affects short-term profitability.  Management at public companies, in contrast, has to deal with quarterly reporting requirements, which place constant pressure on management to produce consistent, stable earnings in the short-term.

Choice "a" is incorrect.  Public reporting…

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January 14

By Kaplan Schweser | Posted on January 14, 2017


Answer to Level II Question: C

Answer Explanation: Theta measures the rate at which the time value of the option decays.  The longer the time value, the more valuable the option.  An occasional exception is a European put, when it is deep in-the-money, time to expiration is short, volatility is low and the interest rate is high.

Choice "a" is incorrect.  Gamma is a measure of the sensitivity of the delta to a change in the price of the underlying asset.

Choice "b" is incorrect. …

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January 13

By Kaplan Schweser | Posted on January 13, 2017


Answer to Level II Question: C

Answer Explanation: Vega is a measure of the change in the option price caused by a change in volatility of the return on the underlying asset.

Choice "a" is incorrect.  Delta is a measure of the change in the option's price caused by a change in the underlying asset price.

Choice "b" is incorrect.  Rho is a measure of the change in the option price caused by a change in interest rates.

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January 12

By Kaplan Schweser | Posted on January 12, 2017


Answer to Level II Question: A

Answer Explanation: A change in volatility has the most impact on an option price when the option is at the money.

Choice "b" is incorrect.  Vega, the measure of an option's sensitivity to change in volatility, moves toward zero as an option becomes deep in the money.

Choice "c" is incorrect.  Vega, the measure of an option's sensitivity to change in volatility, is greatest when the option is at the money.  This is true for both puts and calls. …

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January 11

By Kaplan Schweser | Posted on January 11, 2017


Answer to Level II Question: A

Answer Explanation: Volatility and option value are positively related, so a decrease in volatility will cause a decrease in the option price for both calls and puts.

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January 10

By Kaplan Schweser | Posted on January 10, 2017


Answer to Level II Question: B

Answer Explanation: If there is a decrease in the underlying stock price, the value of a call, which is the right to buy the stock would decrease in value and the ability to sell a stock at a set price in light of a market decline increases the value of the put.

Choice "a" is incorrect.  An increase in the underlying stock price increases the value of a call and decreases the value of a put.

Choice "c" is incorrect.  A decrease in volatility…

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January 9

By Kaplan Schweser | Posted on January 09, 2017


Answer to Level II Question: B

Answer Explanation: The use of FIFO in an inflationary pricing environment will lead to higher pretax income, higher taxes, and lower after-tax cash flow.

Choice "a" is incorrect.  Pretax cash flow is the same under both the FIFO and LIFO methods.

Choice "c" is incorrect.  In an inflationary pricing environment, LIFO generates lower pretax income, lower taxes, and higher after-tax cash flow versus FIFO.

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January 8

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December 9

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December 8

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December 7

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December 6

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November 30

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November 28

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November 27

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November 25

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November 22

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November 21

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November 20

By Kaplan Schweser | Posted on November 20, 2016 | Read Article


November 19

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November 18

By Kaplan Schweser | Posted on November 18, 2016 | Read Article


November 17

By Kaplan Schweser | Posted on November 17, 2016 | Read Article


November 16

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November 15

By Kaplan Schweser | Posted on November 15, 2016 | Read Article


November 14

By Kaplan Schweser | Posted on November 14, 2016 | Read Article


November 13

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November 12

By Kaplan Schweser | Posted on November 12, 2016 | Read Article


November 11

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November 10

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November 9

By Kaplan Schweser | Posted on November 09, 2016 | Read Article


November 8

By Kaplan Schweser | Posted on November 08, 2016 | Read Article


November 7

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November 6

By Kaplan Schweser | Posted on November 06, 2016 | Read Article


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November 4

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November 3

By Kaplan Schweser | Posted on November 03, 2016 | Read Article


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November 1

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October 31

By Kaplan Schweser | Posted on October 31, 2016 | Read Article


October 30

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October 29

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October 28

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October 27

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October 24

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October 23

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By Kaplan Schweser | Posted on October 22, 2016 | Read Article


October 21

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October 18

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October 17

By Kaplan Schweser | Posted on October 17, 2016 | Read Article


October 16

By Kaplan Schweser | Posted on October 16, 2016 | Read Article


October 15

By Kaplan Schweser | Posted on October 16, 2016 | Read Article


October 14

By Kaplan Schweser | Posted on October 14, 2016 | Read Article


October 13

By Kaplan Schweser | Posted on October 13, 2016 | Read Article


October 12

By Kaplan Schweser | Posted on October 12, 2016 | Read Article


October 11

By Kaplan Schweser | Posted on October 11, 2016 | Read Article


October 10

By Kaplan Schweser | Posted on October 10, 2016 | Read Article


October 9

By Kaplan Schweser | Posted on October 09, 2016 | Read Article


October 8

By Kaplan Schweser | Posted on October 08, 2016 | Read Article


October 7

By Kaplan Schweser | Posted on October 07, 2016 | Read Article


October 6

By Kaplan Schweser | Posted on October 06, 2016 | Read Article


October 5

By Kaplan Schweser | Posted on October 05, 2016 | Read Article


October 4

By Kaplan Schweser | Posted on October 04, 2016 | Read Article


October 3

By Kaplan Schweser | Posted on October 03, 2016 | Read Article


October 2

By Kaplan Schweser | Posted on October 02, 2016 | Read Article


October 1

By Kaplan Schweser | Posted on October 01, 2016 | Read Article