CBS Financial & Risk Management 3

Question 1

Which scenario best illustrates concentration risk in a business portfolio?

Accepted Answer

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

Answer

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

Question 2

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

Accepted Answer

Financial leverage and interest rate risk

Answer

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

Question 3

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

Accepted Answer

The proportion of financing from creditors versus shareholders

Answer

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

Question 4

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

Accepted Answer

Prioritize risks for mitigation based on their significance

Answer

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

Question 5

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

Accepted Answer

Trade-off theory

Answer

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

(CBS) Certified Business Strategist Practice Test

(CBS) Certified Business Strategist Practice Test

CBS Financial & Risk Management 3