Risk Management

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Question 1
Free
Multiple Choice

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.

Choose correct answer/s
A

I only

B

II only

C

Both I and II

D

Neither I nor II

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Question 2
Free
Multiple Choice

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

Choose correct answer/s
A

Systematic risk

B

Unsystematic risk

C

Operational risk

D

Non-diversifiable risk

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Question 3
Free
Multiple Choice

The most important reason to hedge business risk is to:

Choose correct answer/s
A

reduce the chance of a business takeover.

B

reduce employee theft.

C

reduce management inaccuracies.

D

reduce the chance of financial distress

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Question 4
Free
Multiple Choice

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

Choose correct answer/s
A

enhanced debt capacity.

B

reduced WACC.

C

better currency exchange ratio.

D

ensure adequate cash flows.

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Question 5
Free
Multiple Choice

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

Choose correct answer/s
A

I only

B

II only

C

Both I and II

D

Neither I nor II

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Question 6
Multiple Choice

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

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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.
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Question 7
Multiple Choice

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.

Choose correct answer/s
A
I only
B
II only
C
Both I and II
D
Neither I nor II
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Question 8
Multiple Choice

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

Choose correct answer/s
A
acquisition of additional information
B
forward contracts
C
diversification
D
insurance
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Question 9
Multiple Choice

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

Choose correct answer/s
A
Manufacture the product overseas.
B
Develop more raw material suppliers.
C
Test-market a product.
D
Change advertising.
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Question 10
Multiple Choice

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

Choose correct answer/s
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
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Question 11
Multiple Choice

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

Choose correct answer/s
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.
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Question 12
Multiple Choice

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.

Choose correct answer/s
A
I only
B
II only
C
Both I and II
D
Neither I nor II
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Question 13
Multiple Choice

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

Choose correct answer/s
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.
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Question 14
Multiple Choice

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

Choose correct answer/s
A
Death of key employees
B
Executive bonuses
C
Fraud
D
Product liability
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Question 15
Multiple Choice

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

Choose correct answer/s
A
Product breakage
B
Fraud
C
Unexpected business interruptions
D
Officer liability
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Question 16
Multiple Choice

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

Choose correct answer/s
A
Using general purpose assets.
B
Hedging through a futures contract.
C
Increasing the customer base.
D
Using patents and copyrights.
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Question 17
Multiple Choice

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

Choose correct answer/s
A
Legal action
B
Takeover threats
C
Diversification
D
Retained earnings
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Question 18
Multiple Choice

Which of the following is a firm-specific asset?

Choose correct answer/s
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.
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Question 19
Multiple Choice

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

Choose correct answer/s
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
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Question 20
Multiple Choice

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.

Choose correct answer/s
A
I only
B
II only
C
Both I and II
D
Neither I nor II
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