Risk Management & Mitigation Flashcards
7 cards from real BCA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management & Mitigation flashcards as text
A privately held business has never been audited and relies on internally prepared financial statements. From a risk standpoint, an appraiser should:
Answer: Apply a higher risk premium to reflect the reduced reliability of unaudited financials
Unaudited financials carry greater risk of misstatement, warranting a higher company-specific risk premium or adjustments to normalize reported earnings.
Which valuation approach is most sensitive to changes in the company-specific risk premium used in the discount rate?
Answer: Income approach using discounted cash flow
The DCF income approach converts future cash flows to present value using a discount rate; even small changes in the company-specific risk premium significantly affect the resulting value.
A business operates in an industry facing potential disruption from emerging technology. An appraiser should reflect this by:
Answer: Reducing the forecast horizon or increasing the risk premium to account for obsolescence risk
Technology disruption risk may truncate the useful life of the business model, and should be reflected in shortened projections or higher discount rates.
What is the primary purpose of scenario analysis in business risk management and valuation?
Answer: To examine how different assumptions about risk factors affect the range of possible outcomes
Scenario analysis tests optimistic, base, and pessimistic cases to understand the range of potential outcomes under different risk conditions.
A company has recently settled a class-action lawsuit for $10 million and faces potential future claims from the same issue. An appraiser valuing this business should:
Answer: Deduct the settled amount and reserve for probable future claims in the value calculation
Known liabilities should be deducted from value, and if similar future claims are probable, an additional reserve or risk premium should be applied.
In risk matrix terminology, a risk that is 'high likelihood and high impact' should be prioritized for which response?
Answer: Immediate active mitigation or avoidance
High-likelihood, high-impact risks pose the greatest threat and require proactive strategies such as mitigation plans, avoidance, or transfer to third parties.
Which of the following best illustrates 'risk retention' as a deliberate business strategy?
Answer: Establishing a self-insurance reserve fund to cover expected losses internally
Risk retention involves consciously choosing to absorb potential losses internally, often through self-insurance reserves when the cost of transfer exceeds the expected loss.