Question 1

A(n)________ attempts to minimize taxes on a family business passed from one generation to the next by creating two classes of stock-one for the parents (preferred stock),whose value is locked in,and another for the children (common stock),whose value reflects the market value of the business.

Accepted Answer

An estate freeze attempts to minimize taxes on a family business passed from one generation to the next by creating two classes of stock-one for the parents (preferred stock),whose value is locked in,and another for the children (common stock),whose value reflects the market value of the business.

Question 2

Insurance companies are able to assume so much risk because:

Accepted Answer

Insurance companies are able to assume so much risk because they share the risk among numerous policy holders. By pooling the premiums of many policyholders, insurers are able to collect enough money to cover claims that may arise, making it possible for them to offer coverage to individuals or businesses that might not otherwise be able to afford it. This spreading of risk also allows insurers to stay in business even if they have to pay out claims on some policies.

Question 3

A small fireworks manufacturer that shuts its plant down permanently because the risk of fire and the resulting losses are too great is relying on a risk ________ strategy.

Accepted Answer

The small fireworks manufacturer is eliminating the risk of fire and resulting losses by shutting down permanently, rather than trying to reduce or anticipate the risk or transfer the risk to another party. This indicates a risk avoidance strategy.

Question 4

A(n)________ is a contract that co-owners often rely on to ensure the continuity of a business.

Accepted Answer

A buy/sell agreement is a contract between co-owners that outlines the terms and conditions of buying out a departing owner's interest in the business to ensure continuity. This agreement provides a way for the remaining owners to purchase the departing co-owner's share of the business at a predetermined price, typically triggered by a specific event such as retirement, death, or disability. This helps to prevent disputes and ensures that the business can continue to operate smoothly. The other answer choices are not typically used for business continuity purposes.

Question 5

________ allow employees and/or managers (that is,the future owners)to purchase the business gradually,which frees up enough cash to finance the venture's future growth.

Accepted Answer

Employee stock ownership plans (ESOPs) allow employees and/or managers to gradually purchase the business, often through contributions to a trust that holds shares on their behalf. This can free up cash for the business while also providing ownership and financial incentives for employees. It also allows for a smooth transition of ownership and management.

Question 6

A company using a risk transfer strategy would do which of the following?

Accepted Answer

A risk transfer strategy involves transferring the financial impact of the risk to another party, usually through purchasing insurance. By buying an insurance policy, the company is transferring the risk to the insurance provider, who will then bear the financial cost of the risk if it materializes.

Question 7

There are specific requirements for insurability which include:

Accepted Answer

For insurability, it is essential that the value of the actual loss can be determined. This allows insurance companies to assess the risk and set premiums accordingly. Choices B, C, and D are not standard requirements for insurability. Risk selection is a fundamental aspect of insurance underwriting, risks can span multiple geographical areas, and the need is for a pool of insureds, not insurers, to spread the risk.

Question 8

The ________ is a transfer of ownership strategy for an owner to transfer the company to his/her children while retaining control over it him/herself.

Accepted Answer

The transfer of ownership strategy described in the question is best described as a family limited partnership. This allows the owner to transfer ownership to their children while still retaining control over the company. The other options listed are different types of trusts, which may also be used for transferring ownership or assets, but do not specifically involve retaining control.

Question 9

The business owner's policy (BOP)typically includes only:

Accepted Answer

The business owner's policy (BOP) typically includes property and casualty insurance to cover physical damages to property or business assets, liability insurance to cover legal fees and damages in case of accidents or injuries on the business premises, and business interruption insurance to cover lost income due to a covered event. Theft and crime insurance, as well as disability and hospitalization insurance, are not typically included in a BOP. Pensions and annuities, and health insurance, are typically offered as separate employee benefits.

Question 10

When a business owner purchases protection for losses occurring when a contract is not completed on time or is performed incorrectly,it is buying ________ insurance.

Accepted Answer

Surety insurance protects the business owner from financial loss if a contracted project is not completed on time or is performed incorrectly by the contractor. It is a type of bond that guarantees the completion of the project according to the specifications outlined in the contract. Casualty insurance covers losses resulting from events such as accidents and thefts, liability insurance protects against legal claims resulting from injuries or damages caused by the business operation, and comprehensive insurance provides broader protection for a range of risks. Therefore, B) surety is the best choice for the scenario described in the question.

Question 11

________ is the transfer of risk from one entity (an individual,a group,or a business)to an insurance company

Accepted Answer

Insurance is the transfer of risk from one entity to an insurance company. The entity pays a premium to the insurance company, which agrees to pay for losses (typically financial) that may occur in the future.

Question 12

In a(n)________,managers and/or employees borrow money from a financial institution and pay the owner the total agreed-upon price at closing;they then use the cash generated from the company's operations to pay off the debt.

Accepted Answer

The described scenario is a Leveraged Buyout (LBO), where managers or employees borrow money from a financial institution to purchase the company from the current owner. The new owners then use the cash flow generated by the company to pay off the debt. The other choices (A, B, and D) do not involve borrowing money to purchase a company.

Question 13

A company using a risk anticipation strategy would do which of the following?

Accepted Answer

A company using a risk anticipation strategy would set resources aside to deal with the problem when it arose. This approach involves identifying potential risks and designing a plan to mitigate or manage them effectively should they occur. This could include implementing safeguards, creating contingency plans, and allocating resources to address any issues that arise. Buying insurance, ceasing processes, or educating employees are all potential components of a risk anticipation strategy, but on their own, they do not constitute a comprehensive approach to managing risk.

Question 14

________ insurance is protection from loss,theft,or destruction applied to vehicles,buildings,etc.It can be written with a broad coverage or to cover a specific item or items.

Accepted Answer

The definition provided in the question specifically describes property insurance, making it the correct choice. Options A, B, and C provide coverage for a different type of risk (life/health, retirement, and work-related injuries, respectively) and are not relevant to the question.

Question 15

When a risk is evaluated in terms of how much it could affect a company's ability to operate,the risk is being assessed in terms of:

Accepted Answer

When a risk is being evaluated in terms of the impact it could have on a company's ability to operate, it is being assessed in terms of its severity. Probability (A) refers to the likelihood of the risk occurring, cost (B) refers to the financial implications of the risk, and actuality (C) is not a commonly used term in risk assessment.

Question 16

A company that installs a sprinkler system in its corrugated box factory is using a risk ________ strategy.

Accepted Answer

The company is taking a risk reduction strategy by installing a sprinkler system to reduce the likelihood and impact of a potential fire. Risk avoidance would involve not operating the factory at all to avoid any risks. Risk anticipation would involve predicting and preparing for potential risks, but not necessarily taking action to reduce them. Risk transfer would involve transferring the risk to another party, such as through insurance, which is not necessarily applicable in this situation.

Question 17

A small business that puts aside a specific amount of money into a special fund each month to cover the cost of replacing its highly specialized manufacturing equipment is using a risk ________ strategy.

Accepted Answer

The small business is anticipating the risk of having to replace its highly specialized manufacturing equipment by setting aside a specific amount of money each month. This is an example of a risk anticipation strategy. Risk avoidance involves avoiding the risk altogether, while risk reduction involves taking actions to minimize the likelihood or impact of the risk. Risk transfer involves transferring the risk to another party, such as through insurance or outsourcing. None of these strategies are being employed in this scenario.

Question 18

A small business that buys a fire insurance policy on the equipment in its corrugated box factory is relying on a risk ________ strategy.

Accepted Answer

By buying a fire insurance policy, the small business is transferring the risk of potential fire damage to the insurance company. Therefore, the strategy being employed is risk transfer.

Question 19

Life insurance differs from all other types of insurance in that:

Accepted Answer

The answer of Life insurance differs from all other types...

Question 20

In a grantor-retained annuity trust:

Accepted Answer

In a grantor-retained annuity trust, the grantor retains the voting power and interest income from the stock in the trust for up to ten years, making option C the correct choice. Option A describes a two-class stock structure, which is not necessarily characteristic of a grantor-retained annuity trust. Option B describes the annual exemption for gift taxes, which is not specific to this type of trust. Option D describes a predetermined formula for purchasing stock, which may be a feature of a buy-sell agreement but is not specific to a grantor-retained annuity trust.

Quiz 20: Management Succession and Risk Management Strategies in the Family Business

A(n) ________ attempts to minimize taxes on a family business passed from one generation to the next by creating two classes of stock-one for the parents (preferred stock) ,whose value is locked in,and another for the children (common stock) ,whose value reflects the market value of the business.