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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: **Option A**: Incorrect. Well-diversified equity investors can eliminate firm-specific risks through diversification. They would typically prefer that the firm NOT hedge industry-specific risks that they can diversify away themselves. Hedging such risks would incur costs without providing additional diversification benefits. **Option B**: **CORRECT**. Debt investors (bondholders) are primarily concerned with the firm's ability to meet its debt obligations. They prefer stable cash flows and reduced volatility in earnings, as this lowers default risk. Hedging strategies that increase revenue stability directly benefit debt investors by reducing the probability of financial distress. **Option C**: Incorrect. Debt investors would typically prefer hedging foreign exchange risk in long-term contracts to ensure stable cash flows and reduce default risk. Equity investors might have mixed preferences depending on their risk tolerance and diversification. **Option D**: Incorrect. Equity investors would typically reward firms for using hedging to reduce tax exposure. Tax reduction through hedging can increase after-tax cash flows and firm value, which directly benefits equity investors. **Key Insight**: Debt investors are risk-averse and prefer stable cash flows to ensure debt repayment, making hedging strategies that increase revenue stability particularly attractive to them.
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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.