Financial & Risk Management Flashcards

Which scenario best illustrates concentration risk in a business portfolio?

Answer: A manufacturer relies on a single supplier for 90% of critical raw materials

Concentration risk occurs when excessive dependence on a single source, customer, or supplier creates vulnerability to a single point of failure.

A company issues bonds to finance expansion. From a risk perspective, this increases:

Answer: Financial leverage and interest rate risk

Issuing bonds increases financial leverage, adding fixed interest obligations and exposing the firm to interest rate fluctuations.

The Debt-to-Equity ratio is used to assess:

Answer: The proportion of financing from creditors versus shareholders

The Debt-to-Equity ratio measures the relative proportions of debt and equity financing, indicating financial leverage and creditor exposure.

In a risk register, assigning a probability and impact score to each identified risk enables management to:

Answer: Prioritize risks for mitigation based on their significance

Probability-impact scoring creates a risk matrix that ranks risks, allowing management to focus resources on the most significant threats.

Which capital structure theory suggests that firms have an optimal debt level where tax shields from debt are balanced against financial distress costs?

Answer: Trade-off theory

Trade-off theory holds that an optimal capital structure exists where the marginal tax benefit of debt equals the marginal cost of financial distress.

A strategic CFO notices that the company's Days Sales Outstanding (DSO) has increased from 30 to 65 days. This most likely indicates:

Answer: Customers are paying more slowly, straining cash flow

Rising DSO means receivables are taking longer to convert to cash, which can strain liquidity even if sales revenue appears strong.

Value at Risk (VaR) is a statistical measure used to quantify:

Answer: The potential loss in value of an asset over a defined period at a given confidence level

VaR estimates the maximum expected loss over a specified time horizon at a chosen confidence level, commonly used in financial risk management.