BCA Risk Management & Mitigation 3

Question 1

A manufacturing firm relies on a single supplier for its primary raw material. The BCA appraiser should classify this as:

Accepted Answer

Operational concentration risk

Answer

Dependence on a single supplier creates operational concentration risk, as any disruption to that supplier directly halts production.

Question 2

Which financial instrument is commonly used to mitigate foreign exchange risk in cross-border business transactions?

Accepted Answer

Forward contracts or currency options

Answer

Forward contracts and currency options lock in exchange rates or provide the right to exchange at a set rate, protecting against adverse currency movements.

Question 3

In a risk-adjusted discount rate model, which scenario would most appropriately call for a LOWER company-specific risk premium?

Accepted Answer

The company has diversified revenue streams and strong management depth

Answer

Diversified revenues and depth of management reduce the idiosyncratic risks that drive up company-specific risk premiums.

Question 4

A technology firm's core product is protected by a patent expiring in two years. An appraiser should:

Accepted Answer

Reflect increased risk and potential revenue decline in the forecast beyond year two

Answer

Patent expiration exposes the company to competition, which should be modeled as increased risk and declining competitive advantage in future cash flow projections.

Question 5

Environmental liability risk in a business valuation is MOST appropriately addressed by:

Accepted Answer

Adding a deduction to the equity value or applying a risk premium

Answer

Known or probable environmental liabilities should either be deducted from indicated value or reflected as a specific risk premium in the discount rate.

(BCA) Business Certified Appraiser Practice Test

(BCA) Business Certified Appraiser Practice Test

BCA Risk Management & Mitigation 3