CBS Financial & Risk Management 2

Question 1

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

Accepted Answer

The company has more current liabilities than current assets

Answer

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

Question 2

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

Accepted Answer

Risk transfer

Answer

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

Question 3

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

Accepted Answer

IRR exceeds the required rate of return

Answer

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

Question 4

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

Accepted Answer

Offset potential losses in one position with gains in another

Answer

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

Question 5

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

Accepted Answer

Statement of cash flows

Answer

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

(CBS) Certified Business Strategist Practice Test