Financial & Risk Management Flashcards

A company has a current ratio of 0.8. What does this indicate about its short-term financial health?

Answer: The company has more current liabilities than current assets

A current ratio below 1.0 means current liabilities exceed current assets, signaling potential liquidity problems.

Which risk management strategy involves transferring the financial consequences of a risk to a third party?

Answer: Risk transfer

Risk transfer shifts the financial burden of a risk to another party, most commonly through insurance or contractual agreements.

In capital budgeting, the Internal Rate of Return (IRR) decision rule states a project should be accepted when:

Answer: IRR exceeds the required rate of return

A project is accepted when its IRR exceeds the company's required rate of return (hurdle rate), indicating value creation.

What is the primary purpose of a hedging strategy in financial risk management?

Answer: Offset potential losses in one position with gains in another

Hedging reduces risk by taking an offsetting position that gains value when the primary position loses value.

Which financial statement best reveals whether a profitable company is generating sufficient cash to meet its obligations?

Answer: Statement of cash flows

The statement of cash flows shows actual cash generated and used, revealing liquidity even when a company reports accounting profits.

A business strategist assessing enterprise risk would classify reputational damage from a product recall as which type of risk?

Answer: Operational risk

Reputational damage from operational failures like product recalls falls under operational risk, which encompasses failures in processes, people, or systems.

The Weighted Average Cost of Capital (WACC) is used in financial management primarily to:

Answer: Set the minimum acceptable return for investments

WACC represents the blended cost of all capital sources and serves as the hurdle rate — the minimum return an investment must generate to create shareholder value.