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Answer: Debt investors would typically prefer that the company use hedging strategies to increase the stability of its revenue stream.
**B is correct.** Debt investors generally have little or no upside from a firm's revenue volatility, so they would prefer that the firm use hedging strategies to make its revenue stream more stable. **A is incorrect.** If the equity investors are already diversified, they would generally prefer that the firm not hedge its firm-specific risks, since most of the risks specific to the firm are already diversified away in the investors' portfolios. **C is incorrect.** Foreign exchange exposure is typically not a core competency of a computer manufacturer, so it would make sense in many instances for the firm to hedge this exposure. Also, since the firm is exposed for a longer period of time, this provides an additional argument in favor of hedging. **D is incorrect.** Hedging tax exposure in this manner increases after-tax earnings, so equity investors would prefer that the firm uses hedges in this case. **Learning Objective:** Evaluate some advantages and disadvantages of hedging risk exposures and explain challenges that can arise when implementing a hedging strategy.
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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.