The answer options of question 2: negate / enhance

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 Theoretically, financial management strategies should be undertaken when they increase the price of the firm's common stock. This means that your analysis of a risk management strategy should also involve an examination of the consequences of the strategy on the firm's free cash flows and its WACC. True or False: For the strategy to increase the firm's share price, it should decrease the firm's expected future free cash flows and/or increase its WACC. O True False In certain cases, bondholders and shareholders hedge their investments individually to meet their desired risk management objectives. This is often referred to as a homemade hedge. The use of a homemade hedge by well-diversified investors can the benefits of risk management activities undertaken by the firm Firms are hesitant to raise external equity, which means most of their capital budgets tend to be financed with debt and internally generated funds. Would more stable cash flows help or hinder a firm as it tries to maintain its optimal capital budget? O Hinder a firm from maintaining its optimal capital budget O Help a firm maintain its optimal capital budget Suppose you are comparing two very similar firms. Their operations are the same, and they differ only with respect to the volatility of their earnings. One firm has a risk management program that effectively stabilizes its earnings, and the second firm has more volatile earnings. Which firm is likely to pay more in taxes over the long run? O The firm with volatile earnings O The firm with stable earnings True or False: Depending on the nature of the risk management activities employed, it is possible that even if the activities do not directly benefit a firm's shareholders, they may benefit other stakeholders of that firm-for example, its managers O True False