ARBA MINCH UNIVERSITY

COLLEGE OF AGRICULTURAL SCIENCES

DEPARTMENT OF RURAL DEVELOPMENT AND AGRICULTURAL EXTENSION

PROGRAM: Agribusiness and Value Chain Management

Test one for the Course: Risk Management in Agribusiness (ABVM 441)

Course Instructor: Bizuayehu A. (M.Sc.)

Target group: 4th Year ABVM Students

Date: March 23, 2015, E.C

Exam Weight: 25%

Time Allowed: 1: 00 hour

Name ______________________________ ID. No ___________ Signature______________

GENERAL INSTRUCTIONS

1. Bringing mobile phones into the exam room is strictly forbidden

2. Write your answer on the answer sheet provided
3. Make sure that the exam has 3 parts and a total of 6 pages including the cover page
4. Any act of cheating is strictly forbidden and results “F” grade.

GOOD LUCK!

1|Page
Part I: Choose the Best Answer from the Given Alternatives (1 point each)
_______ 1. Which one of the following statements is wrong about the concept of risk?

A. Risk is defined as uncertainty concerning the occurrence of a loss

B. Risk refers to exposure to adverse consequences
C. Risk is the probability of any outcome different from the one expected.
D. Risk can be defined as an organized approach to identify possible or probable financial
harm and take steps to minimize the financial impact to acceptable levels
E. None
_______ 2. _______ is defined as the systematic application of management policies, procedures
and practices to the tasks of identifying, analyzing, assessing, treating and monitoring risk.

A. Risk Analysis C. Risk Assessment

B. Risk Management D. Risk Communication E. None

_______ 3. One of the following statement is wrong about sources of risk

A. Production risk stems from uncertainty of factors that affect the quantity and quality of
farm produce
B. Marketing risk exists because of variability of product price and the uncertainty of
future market prices
C. Human resource risks are the risks associated with availability of personnel
D. Financial risk occurs when money is borrowed to finance the farm business

E. None

_______ 4. One of the following is incorrect about the factor that may influence a farmer’s
attitudes toward risk.
A. Farmers who operate under subsistence conditions tend to be the most risk-averse
B. Market-oriented farmers who are not willing or able to withstand the possible financial
losses associated with a risk tend to be more risk-taker
C. Family commitments and responsibilities can play a role in attitudes toward risk.
D. Past experience may also influence a farmer’s decisions.
E. None

2|Page
_______ 5. One of the following is wrong about elements help to quantify risk well
A. Quantifying risk should be stitched into business activities, and done as you set goals,
strategies and plans.
B. Quantify risk individually as a one person’s view of the world.
C. Break down risks into components that can be quantified
D. Perform risk quantification as an iterative process
E. None
_______ 6. ________is a specific risk modelling technique that uses statistical sampling and
probability distributions to simulate the effects of uncertain variables on model outcomes.
A. Quantitative risk analysis C. Monte Carlo analysis
B. Risk quantification D. Quantitative schedule risk analysis
E. None
_______ 7. One of the following statement is not true about risk-reducing inputs
A. Risk-reducing inputs are production inputs that improve the chances of better quantity
or quality of farm products.
B. All inputs are necessarily reduce risk
C. Risk-reducing inputs must be weighed against the cost of using them
D. To determine whether an input will reduce the risk of low yields, farmers must look at
a number of factors simultaneously E. B and C
_______ 8. Which one of the following cannot be a factor affecting market risk?
A. Supply of a product C. Cost of production
B. Demand for a product D. Consumer preference and consumers’ level of income
E. None
______ 9. One of the following is not the aspect that need to be considered in managing financial
risk

A. The availability and cost of credit and the repayment schedule.

B. The farmer’s liquidity or ability to generate cash flow
C. The farmer’s ability to maintain and increase capital
D. All E. None

3|Page
______ 10. Imagine you run a bakery. It's January, and you’re setting up your budget for the year.
You're going to purchase a bunch of wheat during the harvest season in June or July, but don't
know what the price of wheat will be by then. If the weather is bad, the wheat harvest could be
poor and the price could be high; if wheat is abundant, the price could be low. So you call up a
wheat farmer and offer to buy 1,000 bushels of wheat for $8 per bushel. The wheat farmer agrees,
and now you can both plan on that transaction taking place—no matter what happens to the wheat
harvest or price. Which type of contract is agreed between the two parties?

A. Futures contract B. Forward contract C. Options contract

D. A and B E. None

Part II: Say “TRUE” if the statement is correct and “FALSE” if the statement
is incorrect and put a reason for your answer (1 point each)

1. _________ Most small holder farmers are risk takers since they have to deal with everyday
risk in agriculture.
2. _________ The key difference between risk and uncertainty is that “Risk is immeasurable
uncertainty while uncertainty is measurable risk”. This implies that risk is a subset of
uncertainty.
3. _________ If any enterprise wants to survive in the long run, it has to take calculated risks
where the probability of loss is comparatively high, and the chances of gains are lower.
4. _________ Forward contract is an agreement between parties to buy or sell an asset at a
predetermined price on a future date and traded privately on an exchange, not over-the-
counter.
5. _________ Solvency refers to the ability of the business to meet its total debt obligations
determined by comparing the amount of borrowed capital used to the amount of owner’s
equity invested in the business.

4|Page
Part III: Workout (10 pts)

1. Suppose the construction of a new sports complex costs $1 000 000 and is expected to
generate the following net cash flows over the next four years:

Net Cash Flow

Year 1 $210 000

Year 2 $350 000

Year 3 $480 000

Year 4 $450 000

Based on the above data

a) What is the total cash flow over the 4 years? (1pts)

b) What is the payback period? (1pts)
c) What is the profit of the project? (1pts)
d) What is the average annual profit? (1pts)
e) What is the accounting rate of return (ARR)? (1pts)

5|Page
 2. Based on the following data answer the following Questions carefully.
Net Worth Statement
Name: Mr. Y Date: April 2022
All values are in Dollar

Assets Liabilities
Cash on Hand 1750 Operating Loan 14,000
Seed and Feed Inventory 4425 Accounts Payable 3,750
Grain and Feed Inventory 26325 Accrued Interest 3,617
Supplies inventory 36,638 Cash Advances 18,780
Intermediate Intermediate
Breeding Stock 13,875 Breeding Stock Loans ---
Machinery and Equipment 71,000 Machinery and Equipment Loans 6,000
Stocks and Bonds 30,900 Personal Loans
Fixed Long Term
Land 202,680 Building Loans 49,574
Buildings 126,761 Land Loans 99,706

Based on the above given data, Calculate

a) Working capital (1pts)

b) Current ratio and interpret your result (1pts)
c) Debt structure ratio and interpret your result (1pts)
d) Debt ratio and interpret your result (1pts)
e) Debt-to-equity ratio and interpret your result (1pts)

6|Page