ACCA Financial Management (F9) Certification Practice Exam

Economic risk primarily affects which aspect of a company?

1. Short-term cash balance

2. Market share in its home country

3. Long-term cash flow present value

4. Foreign exchange trading profit

The correct answer is: Long-term cash flow present value

Economic risk primarily concerns the potential impact of changing economic conditions on a company's long-term cash flows and their present value. This type of risk arises from factors such as inflation, interest rate fluctuations, and economic downturns that can affect future revenues and costs. When assessing investments and making financial decisions, businesses need to estimate the present value of expected cash flows, which can be significantly influenced by economic conditions. A company experiencing economic risk may find that changes in the economy impact customer demand, operational costs, and ultimately, revenues over a longer timeframe. Since discounted cash flow analysis, a common valuation method, focuses on the present value of future cash flows, economic risk directly influences this aspect. The other aspects listed, such as short-term cash balances, market share, and profits from foreign exchange trading, may be influenced by economic changes but do not capture the core implications of economic risk as closely as long-term cash flow present value does. Economic risk is about the enduring effects that fluctuating economic conditions can have on all future cash flows and the value of those cash flows in today's terms.