CPA Business Environment and Concepts (BEC) : Financial Risk Management
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Example Questions
Example Question #1 : Financial Ratios
When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the asset, it is applying:
Financial leverage
Operating leverage
Working capital management
Return maximization
Working capital management
Working capital management matches the maturity life of each asset with the length of the financial instrument used to finance that asset.
Example Question #1 : Financial Risk Management
If a firm increases its cash balance by issuing additional shares of common stock, working capital:
Remains unchanged and the current ratio remains unchanged
Increases and the current ratio increases
Increases and the current ratio decreases
Increases and the current ratio remains unchanged
Increases and the current ratio increases
An increase in cash balance by issuing more common stock would increase assets and equity, thus increasing working capital and current ratio.
Example Question #3 : Financial Ratios
The main reason that a firm would strive to reduce the days sales in accounts receivable is to increase:
Contribution margin
Cost of good sold
Cash
Accounts receivable
Reducing the A/R cycle increases cash collected and on hand.
Cash
Reducing the A/R cycle increases cash collected and on hand.
Example Question #2 : Financial Risk Management
Which of the following would increase the working capital of a firm?
Payment of a 20 year mortgage payable with cash
Refinancing a short term note payable with a two year note payable
Purchase of a new plant financed by a 20 year mortgage
Cash collection of A/R
Refinancing a short term note payable with a two year note payable
This answer would increase the working capital of a firm as the amount of this current liability is transferred to a long term liability.
Example Question #3 : Financial Risk Management
The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations is the policy that finances:
Permanent current assets with short term debt
Fluctuating current assets with long term debt
Permanent current assets with long term debt
Fluctuating current assets with short term debt
Permanent current assets with short term debt
The working capital financing policy that finances permanent current assets with short term debt subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations.
Example Question #2 : Financial Ratios
Fewer days sales in accounts receivable are:
Not ideal
Ideal as long as the company does not lose too many sales
Ideal
Irrelevant
Ideal as long as the company does not lose too many sales
Reducing the number of days it takes to collect cash is ideal for a company, as long as it does not reduce the number of sales to customers. Customers may not like this shortened receivable policy.
Example Question #4 : Financial Risk Management
Portfolio managers develop portfolios of different investments to combine, offset, and thereby reduce overall risk. However, not all risks can be eliminated by development of a portfolio. Risks that cannot be eliminated through diversification are called:
Firm-specific risks
Unsystematic risks
Non-market risks
Systematic risks
Systematic risks
Risk that cannot be mitigated by diversification is known as systematic risk.
Example Question #4 : Financial Risk Management
A financial institution is looking to assess its investment portfolio's exposure to price changes. Which of the following techniques would most likely be employed by the institution?
Market value at risk analysis
Earnings at risk analysis
Back testing analysis
Cash flow at risk analysis
Market value at risk analysis
Price risk is the exposure that an investor has to a decline in the value of a portfolio or individual securities. Being able to understand the value at risk is an important step in managing price risk.
Example Question #6 : Financial Risk Management
Which of the following types of risk can be reduced by diversification?
Labor strikes
Inflation
Recessions
High interest rates
Labor strikes
This risk can be mitigated by diversification. This form of risk is also known as unsystematic risk.
Example Question #7 : Financial Risk Management
Managers who anticipate greater return for greater risk are referred to as having what attitude toward risk?
Risk seeking
Cautious
Risk indifferent
Risk averse
Risk averse
This behavior describes managers who demand more return on an investment as risk increases.
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