Which of the Following Statements Concerning Risk Management Is NOT

question 5

Multiple Choice

Which of the following statements concerning risk management is NOT CORRECT?

• A) Risk management can reduce the volatility of cash flows, and this decreases the probability of bankruptcy.
• B) Risk management makes sense for firms directly engaged in activities that involve commodities whose values can be hedged, and it doesn't make much sense for most other firms.
• C) Companies with volatile earnings pay more taxes than more stable companies due to the treatment of tax credits and the rules governing corporate loss carry-forwards and carry-backs. Therefore, our tax system encourages risk management to stabilize earnings.
• D) Risk management can reduce the likelihood of low cash flows, and therefore reduce the probability of financial distress.
• E) Risk management involves identifying events that could have adverse financial consequences and then taking actions to prevent and/or to minimize the damage caused by these events.

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Definitions:

Covenant Violations

These are breaches of the terms agreed upon in debt agreements, potentially leading to penalties or the acceleration of debt repayment.

Interest Rates

The percentage of a sum of money charged for its use, usually expressed as an annual percentage.

Pay "at Risk"

Compensation models where parts of an individual's income are not guaranteed and depend on performance or achievement of targets.

Corporate Ladder

A metaphor for the structured hierarchy within a corporation, indicating possible paths for career advancement.