CMA Economic & Financial Analysis 2 — Questions and Answers
Question 1: Which yield curve shape typically signals an upcoming economic recession?
- Steep upward-sloping curve
- Flat yield curve
- Inverted yield curve (Correct answer)
- Humped yield curve
Correct answer: Inverted yield curve
An inverted yield curve, where short-term rates exceed long-term rates, has historically preceded recessions by 6-18 months.
Question 2: A company's current ratio is 1.8 and its quick ratio is 0.9. What does this discrepancy most likely indicate?
- The company has excessive cash holdings
- The company carries a large inventory balance (Correct answer)
- The company has high accounts receivable
- The company has low short-term debt
Correct answer: The company carries a large inventory balance
A large gap between current and quick ratios indicates significant inventory, since the quick ratio excludes inventory from current assets.
Question 3: What does the term 'crowding out' refer to in macroeconomics?
- Monopolistic firms eliminating competitors
- Government borrowing raising interest rates and reducing private investment (Correct answer)
- Excess labor supply depressing wages
- Central bank purchases reducing bond yields
Correct answer: Government borrowing raising interest rates and reducing private investment
Crowding out occurs when government deficit spending increases demand for loanable funds, raising interest rates and displacing private sector investment.
Question 4: In discounted cash flow analysis, which scenario would INCREASE the estimated intrinsic value of a stock?
- Increasing the discount rate
- Decreasing projected free cash flows
- Lowering the terminal growth rate assumption
- Reducing the weighted average cost of capital (Correct answer)
Correct answer: Reducing the weighted average cost of capital
A lower WACC reduces the discount rate applied to future cash flows, increasing their present value and thus the intrinsic value estimate.
Question 5: The Quantity Theory of Money (MV = PQ) predicts that if money supply doubles and velocity is constant, what happens to nominal GDP?
- Nominal GDP halves
- Nominal GDP remains unchanged
- Nominal GDP doubles (Correct answer)
- Nominal GDP quadruples
Correct answer: Nominal GDP doubles
With constant velocity, doubling M must cause PQ (nominal GDP) to double, since MV must equal PQ.
Question 6: Which financial metric best measures how efficiently a company converts its invested capital into profit?
- Return on equity (ROE)
- Return on invested capital (ROIC) (Correct answer)
- Gross profit margin
- Earnings per share (EPS)
Correct answer: Return on invested capital (ROIC)
ROIC measures net operating profit after tax relative to total invested capital, capturing efficiency across both debt and equity financing.
Question 7: A market analyst observes that consumer confidence has dropped sharply while unemployment claims rise. From a top-down analysis perspective, this most directly affects which stage?
- Industry selection
- Company valuation
- Macroeconomic assessment (Correct answer)
- Technical chart analysis
Correct answer: Macroeconomic assessment
Top-down analysis starts with macroeconomic assessment, and indicators like consumer confidence and unemployment claims are macroeconomic data points.
CMA Economic & Financial Analysis 2
Which yield curve shape typically signals an upcoming economic recession?