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CFA Level II Equity Valuation Practice Questions

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

  1. Question 1, easy

    Brightwater Utilities just paid an annual dividend of USD 2.00 per share, which is expected to grow at 4% a year indefinitely. An analyst estimates the required return on equity at 9%. What is the Gordon growth model value per share?

    • A.USD 40.00
    • B.USD 41.60
    • C.USD 16.00
    • D.USD 23.11
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    Correct answer: B. USD 41.60

    The Gordon growth model uses next year's dividend: V0 = D0(1+g)/(r-g) = 2.00 x 1.04 / (0.09 - 0.04) = 2.08 / 0.05 = USD 41.60. The model requires D1, so the just-paid dividend must be grown one period first.

    • A. Divides the just-paid dividend by r - g, skipping the one-year growth step; that gives 40.00.
    • B. Correct: D1 = 2.08 and r - g = 5%, so 2.08/0.05 = 41.60.
    • C. Adds g to r in the denominator (13%) instead of subtracting, giving 2.08/0.13 = 16.00.
    • D. Divides D1 by the required return alone (2.08/0.09), ignoring growth in the denominator.

  2. Question 2, hard

    Tessera Foods paid a dividend of USD 1.50. Its dividend growth is currently 12% and is expected to decline linearly over eight years to a long-run rate of 4%. The required return is 10%. Using the H-model, what is the value per share?

    • A.USD 26.00
    • B.USD 42.00
    • C.USD 34.00
    • D.USD 33.00
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    Correct answer: C. USD 34.00

    H is the half-life of the decline: 8 / 2 = 4. V0 = D0[(1+gL) + H(gS - gL)]/(r - gL) = 1.50 x [1.04 + 4 x 0.08]/0.06 = 1.50 x 1.36/0.06 = USD 34.00.

    • A. Ignores the above-normal growth term entirely and applies the Gordon model at 4%, giving 26.00.
    • B. Uses the full eight-year decline for H instead of its half (1.50 x 1.68/0.06), giving 42.00.
    • C. Correct: 1.50 x (1.04 + 0.32) / 0.06 = 34.00.
    • D. Drops the (1+gL) growth in the first term (1.50 x 1.32/0.06), giving 33.00.

  3. Question 3, hard

    Trellis Software will pay dividends of USD 1.00 in one year and USD 1.10 in two years. At the end of year two, the analyst expects EPS of USD 4.00 and a sale at a trailing P/E of 12. The required return is 10%. What is the present value per share?

    • A.USD 40.58
    • B.USD 45.55
    • C.USD 50.10
    • D.USD 41.49
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    Correct answer: D. USD 41.49

    Terminal price = 12 x 4.00 = 48.00. V0 = 1.00/1.10 + (1.10 + 48.00)/1.10^2 = 0.909 + 40.579 = USD 41.49. The terminal value is the expected price from the exit multiple, and it is received together with the year-two dividend, so both are discounted two periods.

    • A. Leaves the year-two dividend out of the final cash flow (48/1.21 + 1.00/1.10).
    • B. Discounts the year-two cash flow only one period, overstating value.
    • C. Sums the cash flows without discounting (1.00 + 1.10 + 48.00 = 50.10).
    • D. Correct: 0.909 + 49.10/1.21 = 41.49.

  4. Question 4, medium

    Sable Networks has next-year EPS forecast of USD 3.00 and expected earnings growth of 12% a year. Its current P/E is 24. Peer companies trade at an average PEG ratio of 1.5, with growth expressed in percentage points. Using the peer PEG, what is the implied price per share?

    • A.USD 72.00
    • B.USD 54.00
    • C.USD 36.00
    • D.USD 4.50
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    Correct answer: B. USD 54.00

    Implied P/E = PEG x growth = 1.5 x 12 = 18. Implied price = 18 x EPS of 3.00 = USD 54.00. The company's own P/E of 24 corresponds to a PEG of 2.0, richer than peers.

    • A. Uses the company's own P/E of 24, which is the current price rather than a peer-implied value.
    • B. Correct: 1.5 x 12 = 18; 18 x 3.00 = 54.00.
    • C. Multiplies growth by EPS (12 x 3.00) and skips the PEG ratio.
    • D. Multiplies the PEG by EPS (1.5 x 3.00) and forgets to scale by growth.

  5. Question 5, hard

    Vantage Retail has book value per share of USD 40.00 and expects next-year residual income of USD 2.00 per share. The required return is 10%. Analysts expect abnormal earnings to fade, with a persistence factor of 0.50. What is the intrinsic value per share using continuing residual income?

    • A.USD 43.33
    • B.USD 60.00
    • C.USD 41.82
    • D.USD 44.00
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    Correct answer: A. USD 43.33

    With a persistence factor w, V0 = B0 + RI1/(1 + r - w) = 40 + 2.00/(1 + 0.10 - 0.50) = 40 + 2.00/0.60 = USD 43.33. Fading RI is worth far less than permanent RI.

    • A. Correct: 40 + 2.00/0.60 = 43.33.
    • B. Treats RI as permanent (2.00/0.10 = 20), ignoring the fade.
    • C. Discounts only one year of RI (2.00/1.10), assuming it vanishes after year one.
    • D. Uses 1 - w as the denominator (2.00/0.50 = 4), leaving out the required return.

  6. Question 6, medium

    Bay Aero builds aircraft interiors. Capital needs and regulation block new entrants, there are no close substitutes, and the firm has many alternative suppliers. Three airline customers account for about 80% of industry sales and can switch suppliers at modest cost. Which competitive force most limits industry profitability?

    • A.Threat of new entrants
    • B.Bargaining power of buyers
    • C.Bargaining power of suppliers
    • D.Threat of substitute products
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    Correct answer: B. Bargaining power of buyers

    Porter's framework asks which force is strongest. Entry is blocked, substitutes are absent and suppliers are many, but three customers with low switching costs hold concentrated purchasing power and can bargain prices down.

    • A. Wrong: capital needs and regulation make entry difficult.
    • B. Correct: concentrated buyers with low switching costs can force price concessions.
    • C. Wrong: many alternative suppliers weaken supplier leverage.
    • D. Wrong: the facts state there are no close substitutes.

  7. Question 7, medium

    Orchard Medical has EBITDA of USD 150 million, net debt of USD 300 million and 50 million shares outstanding. Comparable firms trade at an EV/EBITDA of 8.0. What is the implied value per share of Orchard Medical?

    • A.USD 24.00
    • B.USD 30.00
    • C.USD 18.00
    • D.USD 12.00
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    Correct answer: C. USD 18.00

    Implied EV = 8.0 x 150 = USD 1,200 million. Equity value = EV - net debt = 1,200 - 300 = 900, so per share = 900/50 = USD 18.00.

    • A. Divides enterprise value by shares without removing net debt, giving 24.00.
    • B. Adds net debt to enterprise value ((1,200 + 300)/50), the opposite of the bridge to equity.
    • C. Correct: (1,200 - 300)/50 = 18.00.
    • D. Deducts net debt twice ((1,200 - 600)/50), giving 12.00.

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