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CFA Level II Corporate Issuers Practice Questions

Official outline
CFA Institute 2026 Level II Topic Outlines (learning outcomes)
Questions on this page
7
Updated
Nov 3, 2026

  1. Question 1, hard

    An analyst estimates the equity beta for a private company using a listed comparable with a levered beta of 1.20, a debt-to-equity ratio of 0.50 and a tax rate of 30%. The private company's target debt-to-equity ratio is 0.25 and its tax rate is 25%. What equity beta should the analyst use?

    • A.1.06
    • B.1.00
    • C.1.20
    • D.0.89
    Show answer and explanationHide answer

    Correct answer: A. 1.06

    Unlevered beta = 1.20 / (1 + 0.70 x 0.50) = 0.889. Relevered beta = 0.889 x (1 + 0.75 x 0.25) = 0.889 x 1.1875 = 1.06. The asset beta is the same across the two firms; leverage and tax differ.

    • A. Correct: 0.889 x 1.1875 = 1.06.
    • B. Ignores taxes in both steps (1.20 / 1.5 x 1.25).
    • C. Uses the comparable's levered beta as is, without adjusting for capital structure.
    • D. Stops at the unlevered beta and never relevers for the target's leverage.

  2. Question 2, medium

    Alpine Holdings sells 20% of a wholly owned subsidiary to the public in an IPO, receives the cash proceeds, and retains control with an 80% stake. Which restructuring transaction is this?

    • A.A spin-off
    • B.A split-off
    • C.A sale of assets to a strategic buyer
    • D.An equity carve-out
    Show answer and explanationHide answer

    Correct answer: D. An equity carve-out

    In an equity carve-out the parent sells a minority stake to outside investors, raising cash and retaining control. A spin-off instead distributes subsidiary shares pro rata to existing shareholders with no cash raised.

    • A. A spin-off distributes shares to existing shareholders without any cash proceeds.
    • B. A split-off lets shareholders exchange parent shares for subsidiary shares.
    • C. The subsidiary's shares were sold to the public, not its assets to a strategic buyer.
    • D. Correct: minority shares are sold in an IPO for cash while control is kept.

  3. Question 3, easy

    An issuer is preparing disclosures sorted by environmental, social and governance factors. Which of the following is NOT an environmental factor?

    • A.Labor standards in the supply chain
    • B.Greenhouse gas emissions
    • C.Water usage and scarcity
    • D.Waste and pollution management
    Show answer and explanationHide answer

    Correct answer: A. Labor standards in the supply chain

    Supply-chain labor standards are a social factor, reflecting how the firm treats workers and communities. Emissions, water use and pollution management are environmental.

    • A. Correct: labor practices are a social issue.
    • B. Emissions are a classic environmental factor.
    • C. Water use is an environmental factor.
    • D. Waste and pollution control are environmental.

  4. Question 4, easy

    Thistle Corp. has bonds outstanding with a 5% coupon that currently trade to yield 7%. Its marginal tax rate is 30%. What after-tax cost of debt should it use in WACC?

    • A.3.5%
    • B.4.9%
    • C.7.0%
    • D.5.0%
    Show answer and explanationHide answer

    Correct answer: B. 4.9%

    The cost of debt should reflect current market yields, not historical coupons: 7% x (1 - 0.30) = 4.9%. The coupon reflects past conditions and understates the current cost of borrowing.

    • A. Uses the coupon rate after tax (5% x 0.70).
    • B. Correct: 7% x 0.70 = 4.9%.
    • C. Is the pretax yield, with no tax shield applied.
    • D. Is the coupon rate before tax.

  5. Question 5, medium

    Fennel Corp. earns net income of USD 120 million with 60 million shares outstanding. It repurchases 5 million shares at USD 48 using cash that was earning an after-tax return of 2.5%. What is EPS after the buyback?

    • A.USD 2.18
    • B.USD 2.00
    • C.USD 2.07
    • D.USD 1.90
    Show answer and explanationHide answer

    Correct answer: C. USD 2.07

    Cash used = 5 x 48 = 240 million; lost after-tax income = 240 x 2.5% = 6 million, so net income = 114 million. Shares = 55 million; EPS = 114 / 55 = 2.07.

    • A. Reduces shares but ignores the lost income on the cash used (120 / 55).
    • B. Is the pre-buyback EPS, assuming the buyback has no effect on earnings per share.
    • C. Correct: 114 / 55 = 2.07.
    • D. Reduces income but keeps the original share count (114 / 60).

  6. Question 6, medium

    Hazel Corp. has net income of USD 50 million and plans capital spending of USD 60 million. Its target capital structure is 40% debt and 60% equity. Under a residual dividend policy, how much is paid out in dividends?

    • A.USD 26 million
    • B.USD 0
    • C.USD 14 million
    • D.USD 50 million
    Show answer and explanationHide answer

    Correct answer: C. USD 14 million

    Equity financing needed = 60% x 60 = 36 million; the residual is 50 - 36 = 14 million. The other 24 million of the capex comes from new debt in line with the target structure.

    • A. Deducts the debt share (24) instead of the equity share (36).
    • B. Treats all capex as equity-funded, which would use up net income entirely.
    • C. Correct: 50 - 0.60 x 60 = 14.
    • D. Pays out all net income and ignores the investment funding need.

  7. Question 7, medium

    Cypress Ltd. follows a target payout of 40% of earnings and adjusts toward it with a speed of adjustment of 0.5 each year. Last year's dividend was USD 1.50 per share and this year's EPS is USD 5.00. What is the expected dividend per share this year?

    • A.USD 2.00
    • B.USD 1.75
    • C.USD 1.50
    • D.USD 1.25
    Show answer and explanationHide answer

    Correct answer: B. USD 1.75

    Under the partial adjustment model: expected dividend = prior dividend + adjustment factor x (target payout x EPS - prior dividend) = 1.50 + 0.5 x (2.00 - 1.50) = 1.75.

    • A. Jumps straight to the target dividend (40% x 5.00), ignoring the gradual adjustment.
    • B. Correct: 1.50 + 0.5 x 0.50 = 1.75.
    • C. Assumes no change from last year's dividend.
    • D. Subtracts the adjustment instead of adding it.

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