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Applied Finance & Economics Flashcards

7 cards from real CIMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Applied Finance & Economics flashcards as text

  1. The Gordon Growth Model (dividend discount model) values a stock as D1 / (k – g). If dividends are expected to grow at 5% indefinitely and the required return is 9%, and next year's dividend is $2.00, what is the stock's intrinsic value?

    Answer: $50.00

    V = $2.00 / (0.09 – 0.05) = $2.00 / 0.04 = $50.00.

  2. Which of the following is an example of expansionary fiscal policy?

    Answer: The government increases infrastructure spending

    Expansionary fiscal policy involves increasing government spending or cutting taxes to stimulate aggregate demand.

  3. In fixed income analysis, what does the 'option-adjusted spread' (OAS) represent?

    Answer: The spread above Treasuries after removing the value of any embedded options

    OAS strips out the value of embedded options (e.g., call provisions), leaving the spread that compensates purely for credit and liquidity risk.

  4. A firm has an asset turnover ratio of 2.0 and a net profit margin of 5%. Using the DuPont framework, what is the return on assets (ROA)?

    Answer: 10.0%

    ROA = Net Profit Margin × Asset Turnover = 5% × 2.0 = 10%.

  5. When two countries with different comparative advantages trade, the primary economic benefit is:

    Answer: Both countries can consume beyond their individual production possibility frontiers

    Comparative advantage and trade allow both countries to specialize and consume combinations outside their own production possibility frontiers.

  6. Which of the following best characterizes a 'contango' situation in futures markets?

    Answer: Futures prices exceed the current spot price, with prices rising with maturity

    Contango describes a market where futures prices are higher than the current spot price and increase with time to maturity.

  7. A portfolio manager wants to reduce a portfolio's duration from 8 years to 5 years using Treasury futures. The manager should:

    Answer: Sell Treasury futures contracts

    Selling Treasury futures reduces portfolio duration because futures prices fall when rates rise, offsetting interest rate sensitivity in the portfolio.