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:

Probability

A measure of the likelihood of an event occurring, expressed as a number between 0 (impossible) and 1 (certain).

Probability

A numerical expression ranging from 0 to 1 indicating the probability of a certain event's occurrence.

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