Economic & Financial Analysis Flashcards
7 cards from real CMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Economic & Financial Analysis flashcards as text
A country runs a persistent current account deficit. According to the twin deficits hypothesis, this is most likely associated with:
Answer: A fiscal deficit and low national savings
The twin deficits hypothesis posits that government budget deficits reduce national savings, which must be financed by foreign capital inflows, producing a current account deficit.
Which valuation approach is most appropriate for valuing a company with negative earnings but substantial tangible assets?
Answer: Asset-based valuation
Asset-based valuation focuses on the net fair value of a company's assets and liabilities, making it suitable when earnings are negative but tangible assets are significant.
Which concept explains why rational investors require a higher return from stocks than from risk-free government bonds?
Answer: Equity risk premium
The equity risk premium is the excess return investors demand over the risk-free rate to compensate for the higher volatility and uncertainty of equity investments.
An analyst notes that a company's operating cash flow is consistently higher than its net income. Which of the following is the MOST likely explanation?
Answer: The company has large non-cash charges such as depreciation
Significant non-cash charges like depreciation are added back to net income when computing operating cash flow, causing OCF to exceed net income.
Which economic indicator is considered a LAGGING indicator of economic activity?
Answer: Unemployment rate
The unemployment rate is a lagging indicator because businesses typically reduce or increase payrolls only after economic trends are well-established.
In portfolio analysis, the Sharpe ratio measures:
Answer: Risk-adjusted return using standard deviation as the risk measure
The Sharpe ratio equals excess return over the risk-free rate divided by the portfolio's standard deviation, measuring return per unit of total risk.
A firm's WACC is 8% and it is evaluating a project with an IRR of 6%. What should the analyst recommend?
Answer: Reject the project because IRR is below WACC
When IRR falls below the cost of capital (WACC), the project destroys value — the investment earns less than what it costs to fund it.