Deck 15: Growth Strategy

Question 1

Which of the following is not a common reason for a merger?

A) To reduce uncertainty
B) To achieve economies of scale
C) To achieve faster growth
D) To increase competition

Answer 1

To increase competition

Question 2

The minimum efficient scale is

A) the plant size at which marginal cost is lowest.
B) the minimum scale at which the firm can make a profit.
C) the plant size at which all economies of scope are first realised.
D) the plant size at which all economies of scale are first realised.

Answer 2

the plant size at which all economies of scale are first realised.

Question 3

The valuation ratio is also known as the

A) borrowing ratio.
B) price to book ratio.
C) take- over ratio.
D) shareholder ratio.

Answer 3

price to book ratio.

Question 4

Which of the following results of mergers is most likely to be in the interest of customers?

A) Diversification
B) Economies of scale
C) Increased market value
D) Reduced uncertainty

Question 5

Which of the following is usually the most appropriate source of finance for short- term funds?

A) Venture capital
B) A bank loan or overdraft
C) A bond issue
D) A share issue

Question 6

If a soft drinks manufacturer merges with a drug company, this is called a______merger Whereas, if a car maker merges with a car selling company, this is called a________ meregr

A) conglomerate; vertical
B) horizontal; vertical
C) natural; vertical
D) conglomerate; horizontal
Merger.

Question 7

If a supermarket chain takes over a number of independent grocers, this is called a________ merger, whereas the merger of a fibre producer and a clothing firm would be a_________ merger.

A) vertical; horizontal
B) horizontal; vertical
C) conglomerate; natural
D) natural; conglomerate

Question 8

The merger of a fibre producer and a clothing firm would be a________merger.

A) homogeneous
B) hostile
C) horizontal
D) conglomerate
E) vertical

Question 9

The merger of two clothing firms would be a merger, whereas the merger of a clothing firm and a software producer would be a merger.

A) vertical; conglomerate
B) conglomerate; vertical
C) homogeneous; natural
D) horizontal; conglomerate

Question 10

When comparing a growth- maximising firm with a short- run profit- maximising firm, which one of the following (in the short run) is likely for the growth- maximising firm?

A) A lower price relative to average cost
B) A lower level of advertising
C) A lower level of investment
D) A higher price elasticity of demand at the price charged by the firm
E) A lower equilibrium output

Question 11

The merger of a clothing firm and a software producer would be a_________merger.

A) vertical
B) conglomerate
C) horizontal
D) hostile
E) homogeneous

Question 12

Fear of take- overs will lead firms to maximise

A) profits.
B) growth.
C) sales.
D) sales revenue.
E) managers' utility.

Question 13

Which of the following is not a common reason for a merger?

A) To achieve monopoly power
B) To increase competition
C) To reduce uncertainty
D) To achieve faster growth
E) To achieve economies of scale

Question 14

Which of the following ways of financing growth is likely to result in reduced dividend payments?

A) Issuing shares
B) Retained profits
C) Borrowing
D) All of the above

Question 15

Growth can be either internal or external. An example of internal growth is

A) a horizontal merger.
B) rationalisation.
C) product differentiation.
D) a vertical merger.

Question 16

What is internal expansion?

A) Merging with a competitor
B) Increasing capacity by building a new plant
C) Increasing the efficiency of employees
D) Moving along a short- run average cost curve to the right

Question 17

Diversification involves

A) developing the current range of product in the same market.
B) expanding into new markets.
C) expanding current activities.
D) all of the above

Question 18

Which of the following is not a potential gain from successful vertical integration?

A) Creation of barriers to entry
B) Greater efficiency
C) Gains through final product diversification
D) Reduced uncertainty

Question 19

Which one of the following is a disadvantage of vertical integration?

A) Increased barriers to entry
B) Reduced uncertainty
C) Exploitation of economies of scale
D) Less ability to respond to changing market demand, with secure supply sources

Question 20

Which of the following results of mergers is not likely to be in the interest of customers?

A) Diversification
B) Increased market value
C) Increased market power
D) Economies of scale
E) Growth

Question 21

Which is not an advantage of vertical integration for a firm?

A) Ownership of key sites
B) Increased X efficiency
C) Reduced uncertainty
D) The ability to erect entry barriers
E) Economies of scale

Question 22

Tapered vertical integration reduces the risks of vertical integration

A) by allowing internal and external production of materials.
B) because tapered mergers are carried more slowly than traditional mergers.
C) because tapered mergers are more risky.
D) because tapered mergers have higher capital requirements.

Question 23

External expansion can happen in which two ways?

A) Building a new plant or a strategic alliance
B) Building a new plant or issuing new shares
C) Building a new plant or a merger
D) A merger or a strategic alliance

Question 24

Which of the following is not a factor that could encourage diversification?

A) To solve the principal- agent problem
B) To enable growth
C) To increase stability
D) To maintain profitability

Question 25

Which of the following statements is false?

A) Mergers may increase market power.
B) Mergers may increase total profit.
C) Mergers do not require the agreement of both firms.
D) Mergers may enable faster growth than internal expansion.

Question 26

A merger of two price- making firms producing identical products will

A) lower the 5- firm concentration ratio.
B) make the new firm's demand curve less elastic than the unmerged firms'.
C) make the new firm's demand curve more elastic than the unmerged firms'.
D) increase the level of competition in the market.

Question 27

Which of the following is not a potential objective of diversification?

A) To increase stability
B) To solve the principal- agent problem
C) To maintain profitability
D) To enable growth

Question 28

Which of the following would not be an efficiency gain for a firm that integrates vertically?

A) Economies of scope
B) Co- ordination economies
C) Financial economies
D) Managerial economies

Question 29

What is a joint venture?

A) Two or more firms work together on a project and create a separate company to run the project
B) Two or more firms merge
C) Two or more firms set up a jointly owned subsidiary
D) Two or more firms set up a jointly owned new independent firm

Question 30

A consortium is most likely to be established for

A) to deal with a regularly occurring business problem.
B) a very specific project.
C) to enable economies of scale.
D) increasing competition.

Question 31

Vertical mergers will

A) increase adverse selection problems.
B) reduce moral hazard problems.
C) increase moral hazard problems.
D) reduce adverse problems.

Question 32

What is a consortium?

A) Two or more firms work together on a project and create a separate company to run the project
B) Two or more firms set up a jointly owned subsidiary
C) Two or more firms merge
D) Two or more firms set up a jointly owned new independent firm

Question 33

Strategic alliances are advantageous because firms can benefit from

A) pooling capital.
B) local knowledge.
C) risk- sharing.
D) all of the above

Question 34

Transaction costs are

A) taxes on sales revenues that firms are required to pay to the government.
B) costs of making economic arrangements for production, distribution and sales.
C) commission charges paid to sales representatives.
D) none of the above

Question 35

MES (minimum efficient scale) is the minimum size of a factory or a firm at which all the economies of scale are gained.

Question 36

There is a causal relationship between growth and profitability, but not the other way round.

Question 37

The valuation ratio of a firm is found by dividing its stock market value by its published balance sheet value.

Question 38

External expansion is where a firm grows by becoming multinational.

Question 39

The merger of a bus company and a train company would be a horizontal merger.

Question 40

The move by supermarkets into insurance and banking is diversification.

Question 41

When a consumer electronics firms produces some, but not all, of the components it uses, this is called tapered vertical integration.

Question 42

A vertically integrated firm is likely to benefit from financial economies.

Question 43

Tapered vertical integration is where a firm is partially integrated with an earlier stage of production; it produces some of an input itself and buys some from another firm.

Question 44

The main motive for mergers is to increase profits.

Question 45

When firms set up a joint company to build a tunnel or railway, this is called a strategic alliance.

Question 46

Franchising is when a firm gives another firm the right to sell its products.

Question 47

Joint ventures, consortia and franchising are all forms of strategic alliances.

Question 48

The main advantage of strategic alliances is to enable managers to study foreign markets.

Question 49

Transaction cost theories of the firm cannot explain external growth but can explain internal growth.

Question 50

One demand- side problem is that finite demand naturally places a constraint on the expansion of the firm. Criticise this statement.

Question 51

Explain the main constraints on business growth.

Question 52

How could short- run growth actually reduce profitability?

Question 53

Why does a take- over become more likely when a firm expands rapidly?

Question 54

If growth is to be by internal expansion, the firm will need to increase both its productive capacity (by investment) and the demand for its product (by advertising). Both will require finance. Name three ways in which a firm can finance such expansion.

Question 55

It is claimed that growth through diversification is beneficial for a firm because it allows the spreading of risks. Explain why.

Question 56

Various motives have been suggested for mergers other than the simple desire to grow. Name four.

Question 57

What are the main methods of internal expansion and external expansion?

Question 58

Why do some firms attempt to integrate vertically?

Question 59

What are the three principal factors which might encourage a firm to diversify?

Question 60

What are vertical restraints?

Question 61

What is a strategic alliance?

Question 62

Why might a strategic alliance be formed?

Question 63

How can ideas associated with transaction costs be used to explain the reasons for external growth?