Question

1. Reasons to manage risk Aa Aa Firms deal with different types of risk in their day-to-day operations and adopt risk management strategies. It is important to understand why firms manage risk. A company's share price is a function of two factors: the discounted value of its free cash flows and its weighted average cost of capital (WACC). According to financial theory, the company's managers should accept and implement a risk management strategy if the implementation of the strategy leads to an increase in the price of the firm's common stock. An increase in share price will occur when the strategy involves future free cash flows and/ordecreasing the company's WACC the firm's expected increasing decreasing Fort Worth Cattle Company has applied risk management techniques in an effort to reduce the volatility of its cash flows and to decrease the probability of its bankruptcy. Which of the following objectives is management attempting to achieve through its use of risk management techniques? Check all that apply Develop comparative advantage in hedging Improve its ability to attract lower-cost debt capital and expand its debt capacity Improve management's opportunities for earning bonuses and additional compensation