BCA Risk Management & Mitigation 2 — Questions and Answers
Question 1: A business appraiser is evaluating a company heavily dependent on a single customer accounting for 65% of revenue. Which risk category best describes this?
- Market risk
- Customer concentration risk (Correct answer)
- Liquidity risk
- Regulatory risk
Correct answer: Customer concentration risk
Customer concentration risk arises when a significant portion of revenue depends on one or few clients, making the business vulnerable to loss of that relationship.
Question 2: Which mitigation strategy involves spreading business activities across multiple industries or product lines to reduce exposure?
- Hedging
- Diversification (Correct answer)
- Insurance transfer
- Risk retention
Correct answer: Diversification
Diversification reduces risk by ensuring that a downturn in one area does not devastate the entire business.
Question 3: In a BCA context, 'key person risk' is best mitigated by which of the following?
- Increasing the discount rate
- Purchasing key-man life insurance and cross-training staff (Correct answer)
- Reducing the company's debt
- Expanding into new markets
Correct answer: Purchasing key-man life insurance and cross-training staff
Key-man insurance provides financial protection and cross-training ensures operational continuity if a critical individual departs or dies.
Question 4: When a buyer acquires a business and requires the seller to remain for a transition period, this arrangement primarily mitigates which risk?
- Liquidity risk
- Key person / management continuity risk (Correct answer)
- Currency risk
- Environmental liability risk
Correct answer: Key person / management continuity risk
An earnout or transition agreement keeps critical knowledge and relationships in place, reducing the risk associated with loss of the prior owner.
Question 5: A company operates entirely in one geographic region. From a risk management standpoint, an appraiser would most likely:
- Reduce the capitalization rate
- Apply a geographic concentration premium to the discount rate (Correct answer)
- Ignore the risk as immaterial
- Decrease the terminal growth rate to zero
Correct answer: Apply a geographic concentration premium to the discount rate
Geographic concentration increases risk exposure to regional economic downturns, natural disasters, and local regulatory changes, warranting a higher discount rate.
Question 6: Which of the following best describes a 'risk transfer' strategy in business risk management?
- Accepting and absorbing potential losses internally
- Shifting financial consequences to a third party such as an insurer (Correct answer)
- Eliminating the source of risk entirely
- Monitoring risk without taking action
Correct answer: Shifting financial consequences to a third party such as an insurer
Risk transfer moves the financial impact of a risk to another party, most commonly through insurance policies or contractual indemnifications.
Question 7: In business valuation, an unusually high accounts receivable aging schedule primarily signals which risk?
- Inventory obsolescence risk
- Credit and collection risk (Correct answer)
- Foreign exchange risk
- Regulatory compliance risk
Correct answer: Credit and collection risk
Slow-paying customers or uncollectable receivables indicate credit risk that can threaten cash flow and working capital adequacy.
BCA Risk Management & Mitigation 2
A business appraiser is evaluating a company heavily dependent on a single customer accounting for 65% of revenue.
Which risk category best describes this?