CIC Economic & Financial Analysis 3

Question 1

The monetary transmission mechanism describes how:

Accepted Answer

Central bank policy rate changes propagate through the economy to affect output and inflation

Answer

The monetary transmission mechanism refers to the channels through which changes in the central bank's policy rate affect spending, investment, and ultimately inflation and output.

Question 2

A company's EBITDA margin is 20% and its revenue is $500 million. Its capital expenditures are $30 million and depreciation is $20 million. What is its approximate Free Cash Flow to the Firm (FCFF) before working capital changes?

Accepted Answer

$90 million

Answer

EBITDA = $100M; EBIT = $80M; after-tax (assume 0 for simplicity here the question asks approximate FCFF as EBITDA - CapEx = $100M - $30M = $70M, but FCFF = EBIT(1-t) + D&A - CapEx; since no tax given, approximate = $80M + $20M - $30M = $70M... The closest match to EBITDA - CapEx + D&A approach: $100M - $30M = $70M.

Question 3

Purchasing Power Parity (PPP) theory suggests that in the long run:

Accepted Answer

Exchange rates adjust so that identical goods cost the same across countries

Answer

PPP holds that exchange rates should adjust to equalize the price of identical goods across countries, eliminating arbitrage opportunities.

Question 4

Which of the following best describes the concept of 'crowding out' in economics?

Accepted Answer

Private investment declines because government borrowing raises interest rates

Answer

Crowding out occurs when increased government borrowing raises interest rates, reducing the funds available for and the attractiveness of private investment.

Question 5

An analyst notices a stock's P/E ratio is significantly below its 5-year historical average and below industry peers. Which consideration is MOST important before concluding the stock is undervalued?

Accepted Answer

Whether earnings quality and business fundamentals justify a higher multiple

Answer

A low P/E could reflect a 'value trap' if earnings are deteriorating or of poor quality; fundamental analysis must support the case for multiple expansion.

(CIC) Certified Investment Counselor Practice Test

(CIC) Certified Investment Counselor Practice Test

CIC Economic & Financial Analysis 3