BCA Risk Management & Mitigation 4

Question 1

A company enters a long-term supply agreement with fixed pricing to protect against commodity price volatility. This is an example of:

Accepted Answer

Contractual risk transfer / hedging

Answer

Locking in prices through contracts transfers or hedges the risk of price fluctuation to the counterparty agreeing to the fixed price.

Question 2

When an appraiser identifies that a business has no succession plan, this most directly affects which valuation adjustment?

Accepted Answer

Increase in the company-specific risk premium

Answer

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.

Question 3

Which of the following is an example of 'risk avoidance' in a business context?

Accepted Answer

Deciding not to enter a high-litigation market segment

Answer

Risk avoidance means choosing not to engage in activities that carry unacceptable risk levels, eliminating the exposure entirely.

Question 4

An appraiser notes that a subject company's revenues are highly cyclical, peaking in Q4 each year. The primary financial risk this creates is:

Accepted Answer

Seasonal liquidity risk

Answer

Highly seasonal revenue patterns can cause cash flow shortages in off-peak quarters, creating liquidity risk if the business cannot cover fixed obligations.

Question 5

In the context of BCA appraisal, 'regulatory risk' is best described as:

Accepted Answer

The potential for laws or regulations to adversely impact business operations or value

Answer

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.

(BCA) Business Certified Appraiser Practice Test

(BCA) Business Certified Appraiser Practice Test

BCA Risk Management & Mitigation 4