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Answer: Debt investors would typically prefer that the company use hedging strategies to increase the stability of its revenue stream.
## Explanation Let's analyze each option: **A. Incorrect** - Well-diversified equity investors can diversify away firm-specific risks themselves, so they typically prefer that firms NOT hedge risks that are diversifiable in the market. They would prefer firms only hedge non-diversifiable risks. **B. Correct** - Debt investors (bondholders) are primarily concerned with the firm's ability to make interest payments and repay principal. They prefer stable cash flows and revenue streams to ensure debt obligations are met. Hedging strategies that increase revenue stability directly benefit debt investors by reducing default risk. **C. Incorrect** - Debt investors would typically prefer hedging foreign exchange risk to protect cash flows, while equity investors might have mixed preferences depending on their diversification and risk tolerance. **D. Incorrect** - Equity investors would typically reward firms for tax-reduction strategies through hedging, as reduced taxes increase after-tax profits and shareholder value.
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The newly hired CFO of a publicly traded computer manufacturing company is assessing the concerns and motivations of different stakeholder groups. The CFO focuses on the perspectives of these stakeholders on the firm's hedging strategies. Which of the following statements is correct?
A
If the firm's equity investors hold a well-diversified portfolio, they would typically prefer that the firm hedge risks specific to the computer industry.
B
Debt investors would typically prefer that the company use hedging strategies to increase the stability of its revenue stream.
C
Both equity and debt investors would typically prefer that the firm not hedge the foreign exchange risk of long-term contracts with international customers.
D
Equity investors would typically not reward the firm for using hedging to reduce its tax exposure over a multi-year period.
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