CIC Economic & Financial Analysis 2 — Questions and Answers
Question 1: Which economic indicator is considered a LEADING indicator of future economic activity?
- Unemployment rate
- Building permits issued (Correct answer)
- Personal income
- Industrial production
Correct answer: Building permits issued
Building permits are a leading indicator because they signal future construction activity before it occurs.
Question 2: When the yield curve inverts, it typically signals:
- Accelerating economic growth
- A potential recession in the next 12-18 months (Correct answer)
- Rising inflation expectations
- Central bank rate cuts already underway
Correct answer: A potential recession in the next 12-18 months
An inverted yield curve, where short-term rates exceed long-term rates, has historically preceded recessions by 12-18 months.
Question 3: Which ratio best measures a company's ability to cover short-term obligations using only its most liquid assets?
- Current ratio
- Quick ratio
- Cash ratio (Correct answer)
- Debt-to-equity ratio
Correct answer: Cash ratio
The cash ratio (cash and equivalents divided by current liabilities) is the most conservative liquidity measure, excluding receivables and inventory.
Question 4: A country's current account deficit means it is:
- Spending more on imports than it earns from exports of goods, services, and transfers (Correct answer)
- Running a budget deficit in its federal government
- Experiencing capital outflows exceeding inflows
- Holding more foreign reserves than domestic currency in circulation
Correct answer: Spending more on imports than it earns from exports of goods, services, and transfers
A current account deficit means the country imports more goods, services, and transfer payments than it exports, requiring foreign financing.
Question 5: In the DuPont analysis framework, Return on Equity (ROE) is decomposed into which three components?
- Gross margin, asset turnover, and equity multiplier
- Net profit margin, asset turnover, and equity multiplier (Correct answer)
- Operating margin, debt ratio, and interest coverage
- Revenue growth, EBITDA margin, and leverage ratio
Correct answer: Net profit margin, asset turnover, and equity multiplier
DuPont decomposes ROE into net profit margin (profitability) × asset turnover (efficiency) × equity multiplier (leverage).
Question 6: Stagflation is best described as a period of:
- High inflation combined with rapid economic growth
- Low inflation combined with high unemployment
- High inflation combined with stagnant growth and high unemployment (Correct answer)
- Deflation combined with rising asset prices
Correct answer: High inflation combined with stagnant growth and high unemployment
Stagflation combines stagnant economic growth, high unemployment, and high inflation — a difficult condition for policymakers because standard remedies conflict.
Question 7: Which valuation multiple is most appropriate when comparing companies with different capital structures?
- Price-to-Earnings (P/E)
- Price-to-Book (P/B)
- EV/EBITDA (Correct answer)
- Dividend yield
Correct answer: EV/EBITDA
EV/EBITDA uses enterprise value (which includes debt) in the numerator, making it capital-structure-neutral and appropriate for cross-company comparisons.
CIC Economic & Financial Analysis 2
Which economic indicator is considered a LEADING indicator of future economic activity?