Risk Management & Mitigation Flashcards
7 cards from real BCA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management & Mitigation flashcards as text
A company enters a long-term supply agreement with fixed pricing to protect against commodity price volatility. This is an example of:
Answer: Contractual risk transfer / hedging
Locking in prices through contracts transfers or hedges the risk of price fluctuation to the counterparty agreeing to the fixed price.
When an appraiser identifies that a business has no succession plan, this most directly affects which valuation adjustment?
Answer: Increase in the company-specific risk premium
Absence of a succession plan elevates key person and continuity risk, which is reflected as a higher company-specific risk premium in the discount rate.
Which of the following is an example of 'risk avoidance' in a business context?
Answer: Deciding not to enter a high-litigation market segment
Risk avoidance means choosing not to engage in activities that carry unacceptable risk levels, eliminating the exposure entirely.
An appraiser notes that a subject company's revenues are highly cyclical, peaking in Q4 each year. The primary financial risk this creates is:
Answer: Seasonal liquidity risk
Highly seasonal revenue patterns can cause cash flow shortages in off-peak quarters, creating liquidity risk if the business cannot cover fixed obligations.
In the context of BCA appraisal, 'regulatory risk' is best described as:
Answer: The potential for laws or regulations to adversely impact business operations or value
Regulatory risk encompasses the likelihood that changes in legislation, compliance requirements, or enforcement can reduce a business's revenues, increase its costs, or restrict its operations.
A business appraisal report identifies that the subject company carries significant debt at variable interest rates. The appraiser should:
Answer: Reflect interest rate risk through sensitivity analysis or an appropriate risk premium
Variable-rate debt exposes the business to rising interest costs, which should be addressed through sensitivity analysis or by incorporating a specific risk premium.
Which of the following best describes the concept of a 'risk register' in enterprise risk management?
Answer: A documented inventory of identified risks, their likelihood, impact, and assigned owners
A risk register is a central document cataloging known risks with assessments of probability and impact, and identifies who is responsible for managing each risk.