Question 1

All of the following are losses generally insured by corporations EXCEPT:
A) Death of key employees
B) Executive bonuses
C) Fraud
D) Product liability

Accepted Answer

Executive bonuses are not typically considered insurable losses for corporations, as they are seen as a business expense and not a direct loss. The other choices - death of key employees, fraud, and product liability - are often insured by corporations through various insurance policies.

Question 2

Which of the following is a motive for using insurance to manage risk?
A) Premiums, no matter how high, are consistent and easy to budget.
B) The firm intends to make money from the insurance company if a specified loss happens.
C) The firm does not want to be concerned with small, inconsequential losses and chooses to have the insurance company handle them.
D) Insurance can provide protection against events that can cause financial distress.

Accepted Answer

A

Question 3

Which of the following is a loss that companies would self-insure?
A) Product breakage
B) Fraud
C) Unexpected business interruptions
D) Officer liability

Accepted Answer

Product breakage is a predictable risk that can be quantified and managed through self-insurance. The other options (fraud, unexpected business interruptions, and officer liability) are less predictable and potentially catastrophic, making them more appropriate for traditional insurance coverage.

Question 4

Which of the following is a related benefit of hedging external risks for a company?
A) Management can determine international markets for their product.
B) Management can forecast political events that may impact their sales.
C) Management can focus on performance and compensation factors that are under their control.
D) Management can determine the economic forces that will impact their earnings.

Accepted Answer

By hedging external risks, management can mitigate the impact of unpredictable external factors on the company's financial performance. This allows them to focus on performance and compensation factors that are under their control, such as operational efficiency and cost management.

Question 5

All of the following are non-hedging strategies that can be used to manage business risk EXCEPT:
A) acquisition of additional information
B) forward contracts
C) diversification
D) insurance

Accepted Answer

Forward contracts are a hedging strategy that involves locking in a price for a future transaction to minimize the impact of price fluctuations. Therefore, it is not a non-hedging strategy to manage business risk. The other options listed (acquisition of additional information, diversification, and insurance) are all non-hedging strategies that can be used to manage business risk.

Question 6

Which of the following is/are a company's largest risk?
I. exchange rate risk
II. future raw material price risk
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Accepted Answer

Exchange rate risk and future raw material price risk are two major risks faced by companies. Exchange rate fluctuations can significantly impact a company's earnings, especially if the company is engaged in international trade. Similarly, future raw material price risk can significantly affect a company's profit margins, and it can be challenging for a company to pass on the increased costs to the customers. Therefore, a company needs to manage both these risks effectively to minimize their impact on the bottom line.

Question 7

All of the following are reasons to reduce financial distress EXCEPT:
A) enhanced debt capacity.
B) reduced WACC.
C) better currency exchange ratio.
D) ensure adequate cash flows.

Accepted Answer

A, B, and D are all valid reasons to reduce financial distress. Enhanced debt capacity enables a company to borrow more money at a lower interest rate. Reducing the weighted average cost of capital (WACC) can make a company more attractive to investors and improve profitability. Ensuring adequate cash flows is crucial for any business to continue operating and avoid bankruptcy. However, a better currency exchange ratio is not typically a direct benefit of reducing financial distress. While reducing financial distress could potentially make a company more stable, several other factors contribute to currency exchange ratios, such as macroeconomic policies, supply and demand, and political instability.

Question 8

When a lack of information can result in business risk, management can do all of the following to acquire additional information EXCEPT:
A) Refer to the annual reports of competitors for needed information.
B) Purchase information from those that possess the knowledge needed.
C) Form a panel to evaluate the product
D) Test market a product

Accepted Answer

Referring to the annual reports of competitors may not be a reliable way to gather needed information. Competitors may not reveal accurate or complete information in their annual reports, or the information may not be relevant to the specific business situation. The other options (purchasing information, forming a panel, and test marketing a product) are all valid ways to acquire additional information when a lack of information poses business risk.

Question 9

Which of the following is a firm-specific asset?
A) Sewing machines designed for the manufacture of summer and winter clothes.
B) Fire-retardant paint in lime green.
C) Auto plant that can produce six styles of vehicles.
D) A manufacturing plant that makes spiral staircases, wood railings and stairway carpeting.

Accepted Answer

The answer of Which of the following is a firm-specific...

Question 10

Which of the following statements about hedging of business risks by investors is/are correct?
I. Operational information about companies is widely available and investors find it relatively simple to hedge business risk.
II. Investors have the necessary capital required to implement hedging strategies and do so consistently.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Accepted Answer

Operational information about companies may not always be widely available or simple to interpret for hedging purposes, and not all investors have the necessary capital or consistently implement hedging strategies.

Question 11

Which of the following statements about diversification is/are correct?
I. Diversification may be able to reduce the risk of a portfolio to less than the weighted average risk of the assets.
II.Diversification is always prudent and should be expanded to include new, unrelated products whenever possible.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Accepted Answer

Statement I is correct, as diversification can reduce the overall portfolio risk by spreading investments across different asset classes and reducing the impact of any one asset's performance. However, statement II is not always true, as diversifying into new, unrelated products may not always be the best strategy, especially if those products are not properly understood or aligned with the investor's goals. Therefore, the best choice is A, which only includes the correct statement.

Question 12

The most important reason to hedge business risk is to:
A) reduce the chance of a business takeover.
B) reduce employee theft.
C) reduce management inaccuracies.
D) reduce the chance of financial distress

Accepted Answer

Hedging business risk is aimed at reducing the chance of financial distress. This involves taking measures to protect against unfavorable events that could affect a company's financial performance and stability. By doing so, a company can safeguard its finances and minimize the impact of external factors such as changes in the economy, industry trends or unforeseen events. This can help to ensure the long-term survival and success of the business.

Question 13

Firms work to diversify. All of the following are diversification methods that firms use EXCEPT:
A) Firms seek to expand the customer base.
B) Firms seek to obtain raw materials from a number of suppliers.
C) Firms seek to isolate their product by selling to a single niche market.
D) Firms seek to produce more than one product.

Accepted Answer

Isolating a product to a single niche market is not a diversification method, as it limits the customer base and potential for growth. A key aspect of diversification is expanding the customer base, which is addressed in A. B and D are also methods of diversification, as they involve broadening the sources of raw materials and products offered, respectively.

Question 14

To offset the lack of marketing information which could result in corporate risk, a firm can do which of the following?
A) Manufacture the product overseas.
B) Develop more raw material suppliers.
C) Test-market a product.
D) Change advertising.

Accepted Answer

By test-marketing a product, a firm can gather marketing information before fully launching the product, thereby reducing the risk of failure. The other choices do not directly address the lack of marketing information. Manufacturing overseas, developing more raw material suppliers, and changing advertising may impact production or promotion, but they do not necessarily address the risk associated with insufficient marketing information.

Question 15

Currency and commodity price volatility is a component of which of the following types of risk?
A) Systematic risk
B) Unsystematic risk
C) Operational risk
D) Non-diversifiable risk

Accepted Answer

The answer of Currency and commodity price volatility is a...

Question 16

A firm can reduce risk by gaining control over the operating environment. Which of the following is an example?
A) Using general purpose assets.
B) Hedging through a futures contract.
C) Increasing the customer base.
D) Using patents and copyrights.

Accepted Answer

The answer of A firm can reduce risk by gaining...

Question 17

Which of the following statements is/are correct about a forward contract?
I. Forward contracts require a good faith deposit before an agreement can be reached.
II. Forward contracts are considered extremely risky since the price for the asset is determined when the contract matures.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Accepted Answer

Forward contracts do not typically require a good faith deposit, and the price is determined at the time of the agreement, not at maturity.

Question 18

All of the following are methods whereby a hedge is accomplished EXCEPT:
A) Using derivative securities
B) Owning several shares of a company's stock
C) Buying or selling a forward contract
D) Using an option in the cash market

Accepted Answer

Owning several shares of a company's stock is not a method of hedging, as it represents an investment in a single asset and does not involve any offsetting positions to mitigate risk. The other choices involve the use of derivative securities or contracts to hedge against potential losses.

Question 19

Which of the following statements about risk is/are correct?
I. Risk is the possibility that the actual cash flows will be different that the expected cash flows.
II. Risk management is utilized by companies in order to provide a chance to make a quick profit.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Accepted Answer

Statement I is correct - risk is defined as the possibility that actual cash flows will be different from expected cash flows. Statement II is incorrect - risk management is utilized by companies in order to minimize risk, not to provide a chance to make quick profits.

Question 20

Which of the following is generally used to enforce rights under patents and copyrights?
A) Legal action
B) Takeover threats
C) Diversification
D) Retained earnings

Accepted Answer

Legal action is the primary means by which patent and copyright holders can enforce their rights. This includes filing lawsuits and obtaining court injunctions to prevent unauthorized use or distribution of their intellectual property. Options B, C, and D are not typically used for enforcing patent or copyright rights.

Quiz 21: Risk Management

All of the following are losses generally insured by corporations EXCEPT:

Which of the following is a motive for using insurance to manage risk?

Which of the following is a loss that companies would self-insure?

Which of the following is a related benefit of hedging external risks for a company?

All of the following are non-hedging strategies that can be used to manage business risk EXCEPT:

Which of the following is/are a company's largest risk? I. exchange rate risk II. future raw material price risk

All of the following are reasons to reduce financial distress EXCEPT:

When a lack of information can result in business risk, management can do all of the following to acquire additional information EXCEPT:

Which of the following is a firm-specific asset?

The most important reason to hedge business risk is to:

Firms work to diversify. All of the following are diversification methods that firms use EXCEPT:

To offset the lack of marketing information which could result in corporate risk, a firm can do which of the following?

Currency and commodity price volatility is a component of which of the following types of risk?

A firm can reduce risk by gaining control over the operating environment. Which of the following is an example?

Which of the following statements is/are correct about a forward contract? I. Forward contracts require a good faith deposit before an agreement can be reached. II. Forward contracts are considered extremely risky since the price for the asset is determined when the contract matures.

All of the following are methods whereby a hedge is accomplished EXCEPT:

Which of the following statements about risk is/are correct? I. Risk is the possibility that the actual cash flows will be different that the expected cash flows. II. Risk management is utilized by companies in order to provide a chance to make a quick profit.

Which of the following is generally used to enforce rights under patents and copyrights?