Free CFA Level II Corporate Issuers Practice Questions
Corporate issuers on the CFA Level II exam tests capital budgeting under uncertainty, capital structure theory (Modigliani-Miller), dividend policy, mergers and acquisitions, and corporate governance practices. Weighted 5-10% (CFA Institute).
190 questions90 easy54 medium46 hard2026 syllabus
Sample Questions
Question 1
Easy
The Hamada equation is most commonly used to:
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Correct Answer: B
Solution
B is correct.
The Hamada equation relates a firm's leveraged (equity) beta to its unleveraged (asset) beta: βL=βU[1+(1−t)ED] where βL is the leveraged beta, βU is the unleveraged beta, t is the marginal tax rate, and D/E is the debt-to-equity ratio. This equation is particularly useful in the pure-play method for estimating project-specific betas: unlever a comparable company's beta and relever it to the subject company's capital structure.
Question 2
Medium
A conglomerate merger is least likely motivated by:
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Correct Answer: B
Solution
B is correct — this is the LEAST likely motivation. Economies of scale in production arise from combining similar operations, which is a motivation for horizontal mergers (between companies in the same industry), not conglomerate mergers. By definition, conglomerate mergers involve unrelated businesses, so there are minimal overlapping manufacturing operations to combine.
Question 3
Hard
Using the project finance head's approach, the project-specific WACC is closest to:
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Correct Answer: C
Solution
C is correct.
**Step 1 — Domestic cost of equity (CAPM):** redomestic=4.0%+1.20×5.5%=4.0%+6.6%=10.6% **Step 2 — Country Risk Premium (CRP):** CRP=Sovereign yield spread×σbondσequity=1.80%×1.35=2.43% **Step 3 — Project cost of equity (with CRP):** reproject=10.6%+2.43%=13.03% **Step 4 — After-tax cost of local debt:** rdafter-tax=7.8%×(1−0.24)=7.8%×0.76=5.928% **Step 5 — Project WACC:** WACC=0.40×5.928%+0.60×13.03% =2.371%+7.818%=10.189%≈10.19% The result of approximately 10.19% is the project-specific WACC under the project finance head's approach.
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