CIC Economic & Financial Analysis 4

Question 1

Which of the following is an example of automatic fiscal stabilizers?

Accepted Answer

Progressive income taxes and unemployment insurance payments

Answer

Automatic stabilizers like progressive taxes (which fall automatically in recessions) and unemployment benefits expand/contract without legislative action to smooth the business cycle.

Question 2

When a central bank engages in quantitative easing (QE), it primarily:

Accepted Answer

Purchases securities to inject liquidity and lower long-term interest rates

Answer

QE involves the central bank buying longer-term securities (typically government bonds and MBS) to increase money supply and push down long-term yields.

Question 3

A company reports operating cash flow of $80M, capital expenditures of $25M, and dividends paid of $10M. What is its Free Cash Flow to Equity (FCFE) if net borrowing was $5M?

Accepted Answer

$50M

Answer

FCFE = Operating Cash Flow − CapEx + Net Borrowing = $80M − $25M + $5M = $60M; subtracting dividends is not part of the FCFE formula, so FCFE = $60M. However FCFE = CFO - CapEx + net borrowing = $80 - $25 + $5 = $60M.

Question 4

The concept of 'mean reversion' in financial analysis suggests that:

Accepted Answer

Variables like profit margins and P/E ratios tend to return to long-run averages over time

Answer

Mean reversion implies that extreme values in metrics like profit margins, valuation multiples, or returns tend to drift back toward their long-term historical averages.

Question 5

A firm's operating leverage is HIGH when:

Accepted Answer

Fixed costs represent a large proportion of total costs

Answer

High operating leverage means a large share of costs are fixed, so a small change in revenue produces a magnified change in operating income (EBIT).

(CIC) Certified Investment Counselor Practice Test

(CIC) Certified Investment Counselor Practice Test

CIC Economic & Financial Analysis 4