Section C Test Bank-Risk Management

An economic device whereby an individual substitutes a certain cost(premiums) for an uncertain financial risk is known as _________ a.) diversification b.) insurance c.) risk management d.) uncertainty

B.) Insurance

Incorporating, playing down debt and liability insurance provides a means to _______________ a.) increase profits b.) reduce risks c.) lower expenses d.) increase working capital

B.) reduce risks

If a manager is willing to take a bigger risk, many managers would expect to receive __________ . a.) a lower average net return b.) the same average net return c.) a higher average net return d.) a lower direct net worth

C.) A higher average net return

Which type of forward pricing tool cannot be reversed or offset later? a.) forward contract with a local elevator b.) futures contract c.) put option d.) call option

a.) Forward contract with a local elevator

A financially secure farmer or rancher who is NOT very concerned about avoiding risk, when facing an event with an unpredictable outcome, will choose the strategy that __________ a.) has the highest expected value for its possible outcome b.) has the smallest range between the best and worst possible outcomes c.) historically has had the smallest standards of deviation for its possible outcomes d.) has the lowest probability of an unfavorable outcome

a.) Has the highest expected value for its possible outcome

Which of the following is NOT a source of owner equity for a farm business? a.) loans received to purchase land b.) increases in the value of owned land c.) profit retained in the business d.) assets contributed to the business by the owner(s)

a.) Loans received to purchase land

If $50,000 cash on hand is used to pay a $50,000 operating loan then on the day of the transaction __________ . a.) net worth will NOT change but the current ratio will change b.) neither net worth nor the current ratio will change c.) net worth will increase but the current ratio will NOT change d.) net worth will increase AND the current ratio will change

a.) Net worth will NOT change but the current ratio will change

Most farmers are more likely to accept a risk if __________ a.) only a small possible loss is involved b.) they have a high debt to asset ratio c.) they have high fixed cash flow obligations d.) they are primarily concerned with maintaining their net worth

a.) Only a small possible loss is involved

Lower than average yields are an example of __________ . a.) production risks b.) market risks c.) human risks d.) financial risks

a.) Production risks

A partial budget is designed to analyze the effect of a proposed management change on __________ a.) profit b.) revenue only c.) expenses only d.) crop yields only

a.) Profit

Crop revenue insurance __________ . a.) protects against declines in price or yield b.) only protects against a decline in price c.) only protects against a decline in yield d.) does not protect against declines in price or yield

a.) Protects against declines in price or yield

The act of managing or controlling exposure to risk in order to meet present objectives is known as _________ a.) risk management b.) hedging c.) diversification d.) insurance

a.) Risk management

Which of the following strategies does NOT reduce production risk? a.) selling grain before harvest by a forward contract b.) applying insecticide c.) vaccinating livestock against disease d.) keeping a years supply of extra hay stored

a.) Selling grain before harvest by a forward contract

Under a Yield Protection crop insurance policy, a crop farmers' yield loss results in an indemnity payment based on __________ . a.) the average futures price before planting season b.) the average futures price during the month of harvest c.) the 10-year average cash price for that commodity d.) that actual price the producer receives from selling the remaining crop

a.) The average futures price before planting season

A partial budget is an appropriate tool for analyzing __________ a.) the expansion of an existing enterprise b.) the profit or loss from a single enterprise c.) the cash flows in the business d.) the start up costs in a new business

a.) The expansion of an existing enterprise

Where the probability of an event occurring cannot be empirically determined is known as __________ a.) uncertainty b.) hedging c.) diversification d.) risk management

a.) Uncertainty

The number of shares of stock received by each stockholder when a farm corporation is formed is based on the __________ contributed by each stockholder. a.) value of equity b.) value of total liabilities c.) amount of labor d.) value of total assets

a.) Value of equity

On a certain farm alfalfa yields have been 4.3, 7.2, 5.6, 3.6, 6.7, 7.2, 5.5, 5.7, 4.8 and 5.4 tons per acre in the last 10 years. Assuming past yields are a good indicator of future yields, what is the most likely yield range for the coming year? a.) 4 to 5 tons per acre b.) 5 to 6 tons per acre c.) 6 to 7 tons per acre d.) 7 to 8 tons per acre

b.) 5 to 6 tons per acre

Which of the following are the profit increasing changes on a partial budget? a.) additional costs and additional revenue b.) additional costs and reduced revenue c.) reduced costs and additional revenue d.) reduced costs and reduced revenue

b.) Additional costs and reduced revenue

The production of several special soybean varieties is an example of what type of risk management strategy? a.) specialization b.) diversification c.) hedging d.) contracting

b.) Diversification

Which marketing tool allows a producer to set minimum selling price but still benefit if prices trend upward significantly? a.) hedging b.) put options c.) forward contracting d.) selling on the spot of cash market

b.) Put options

Which of the following marketing strategies provides farmers who sell grain or livestock the LEAST protection against a decline in selling prices before they are ready to actually deliver the commodity? a.) buying PUT options in advance b.) selling at the cash price at the of delivery c.) hedging with futures contracts in advance d.) forward contracting in advance

b.) Selling at the cash price at the time of delivery

Beth purchased two May live-cattle futures contracts in January. One contract is 40,000 lbs. of live cattle. It is currently March. In March, Beth can fulfill her contract obligation by __________ a.) purchasing two May live-cattle futures contracts b.) selling two May live- cattle futures contracts c.) delivering 80,000 lbs. of live cattle to a futures transaction point d.) accepting delivery of 80,000 lbs. of live cattle at a futures transaction point

b.) Selling two May live-cattle futures contracts

In a joint operating agreement, gross income is shared in proportion to each person's contribution to __________ . a.) total labor b.) total costs c.) total assets d.) total liabilities

b.) Total costs

__________ insurance protects farm operators in case of the loss of a building from fire or wind. a.) life b.) property c.) liability d.) multiple peril crop

b.) property

On a partial budget analyzing a change from cow-calf production to stocker-production, using the same pasture acreage and facilities, which of the following would be included as a reduced cost? a.) cull cow sales b.) feeder cattle purchases c.) a fixed interest charge for ownership of breeding livestock d.) pasture rent

c.) A fixed interest charge for ownership of breeding livestock

Which of the following risks can NOT be protected against through the use of insurance? a.) fire b.) crop failures c.) a three year period of low prices d.) the death of a partner or key employee

c.) A three year period of low prices

The safety-first strategy for choosing among risky alternatives assumes that the farm manager is most concerned with a.) achieving the highest average return over the long run b.) achieving the best possible result in a good year c.) avoiding the worst possible result in a bad year d.) minimizing the chances of not breaking even

c.) Avoiding the worst possible result in a bad year

Engaging in several enterprises to protect against risk is known as ________ a.) uncertainty b.) hedging c.) diversification d.) risk management

c.) Diversification

A corporate bond specifies all of the following except __________ a.) maturity date b.) face value c.) equity d.) coupon rate

c.) Equity

Which type of farm lease agreement results in the most price and yield risk for the tenant? a.) crop-share b.) livestock share c.) fixed cash d.) custom farming

c.) Fixed cash

A partial budget includes only revenue and costs that would __________ as a result of a change in certain management practice. a.) increase b.) decrease c.) increase or decrease d.) NOT change

c.) Increase or Decrease

Liability insurance is used to protect against ______ a.) crop less b.) hail damage c.) legal action d.) livestock death loss

c.) Legal Action

A young family that just purchased a home with borrowed money should consider which risk management tool? a.) diversification b.) hedging on future trading c.) life insurance d.) estate plan

c.) Life Insurance

A risk assessment requires managers to consider the __________ . a.) ways to avoid a bad decision b.) what to do if you are wrong c.) magnitude of a bad outcome and the likelihood of a bad outcome d.) ways to reduce fixed costs

c.) Magnitude of a bad outcome and the likelihood of a bad outcome

If a partial budget shows some fixed or ownership costs under Reduced Costs, it means __________ . a.) the proposed alternative required purchasing a new capital asset b.) a new capital asset must be purchased next year with either alternative c.) the proposed alternative would allow sale of a capital asset that will no longer be needed d.) there is an error on the budget as fixed costs are never included under reduced costs

c.) The proposed alternative would allow sale of a capital asset that will no longer be needed

"Basic risk" in marketing refers to __________ . a.) unpredictable up and down movements in the futures market b.) unpredictable up and down movements in the cash market c.) unpredictable changes in the difference between futures and cash markets d.) unpredictable movements in interest rates on operating loans

c.) Unpredictable changes in the difference between futures and cash markets

Which of the following may be included on a partial budget? a.) fixed costs b.) variable costs c.) opportunity costs d.) all of the above

d.) (ALL OF THE ABOVE) Fixed costs, Variable costs, Opportunity costs

risk management is a process by which a business _______ a.) Identifies potential risk exposure, b.) Prioritizes the risk faced by the business, c.) develops a plan to mitigate the exposure d.) all of the above

d.) (All of the Above) Identifies potential risk exposure, Prioritizes the risk faced by the business, develops a plan to mitigate the exposure

Which of the following is NOT a market risk? a.) changes in input prices b.) changes in production prices c.) not being able to gain access to a market for a specific specialty crop d.) changes in cost of production per unit due to yield changes

d.) Changes in cost of production per unit due to yield changes

The amount of debt relative to the value of total assets is an example of __________ . a.) production risks b.) market risks c.) human risks d.) financial risks

d.) Financial risk

Using $20,000 in cash and a new loan of $80,000 to purchase land for $100,000 will cause equality to __________ . a.) increase by $100,000 b.) increase by $20,000 c.) increase by $80,000 d.) NOT change

d.) NOT change

On a partial budget which analyzes switching 120 acres from growing wheat to growing barley, which of the following costs would NOT be included on the budget? a.) seed expense for either crop b.) fertilizer for the barley c.) fertilizer for the wheat d.) property tax on the land

d.) Property tax on the land

A partial budget would be the most useful type of budget for estimating __________ a.) the amount of borrowing required for the next year b.) the break even price needed to cover all costs of cotton production c.) labor needed on the farm during the next year d.) the change in profit from installing an irrigation system in one field

d.) The change in profit from installing an irrigation system in one field

The face value of a bond is __________ a.) the dollar amount that a person would receive if he or she were to sell the bond b.) the dollar amount that a person would receive if he or she were to buy the bond c.) the total value of payments that will be made over the course of the bonds life d.) the dollar amount of the bonds final payment at maturity

d.) The dollar amount of the bond's final payment at maturity

The values shown on a partial budget are __________ . a.) total revenues and total expenses for the farm b.) only total expenses for the farm c.) only total revenue for the farm d.) only changes in revenues and expenses

d.) only changes in revenues and expenses