CFA Level II Corporate Issuers Practice Questions
Question 1
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 explanation
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.
Question 2
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 explanation
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.
Question 3
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 explanation
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.
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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 explanation
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.