Question 1

Isidore Crocker,CEO of Gotham Engines,is strongly in favor of acquiring Carolina Textiles,a firm in an unrelated industry. Some members of the board of directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because

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The answer of Isidore Crocker,CEO of Gotham Engines,is strongly in...

Question 2

Compared with diversification based on intangible resources,diversification based on financial resources is

Accepted Answer

Diversification based on financial resources, such as investing in stocks or through mergers and acquisitions, can be easily imitated by competitors. This means that competitors can also readily access the same financial resources, allowing them to replicate the diversification strategy. Additionally, diversification based solely on financial resources is less likely to create long-term value as it lacks a sustainable competitive advantage. On the other hand, diversification based on intangible resources, such as unique capabilities or intellectual property, can be more difficult to imitate, and has the potential to create long-term value.

Question 3

The curvilinear relationship of corporate performance and diversification indicates that

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The answer of The curvilinear relationship of corporate performance and...

Question 4

During the 1990s top executives of Titanic,Inc.,followed a pattern of aggressive acquisitions and diversification.
Now,Titanic is performing poorly and earning below average returns. Lusitania,a large conglomerate firm,is in the final stages of purchasing Titanic. Lusitania has announced that it will fire Titanic's current top executives. The Titanic executives may not be worried about their impending job loss if they

Accepted Answer

Golden parachutes are a form of severance pay that provides executives with a substantial payout if they are fired due to a change in control of the company, such as a merger or acquisition. This is designed to offer executives financial security and protect them from the potential negative consequences of a change in ownership or management. Therefore, if the Titanic executives have golden parachutes, they may not be as worried about losing their jobs in the acquisition by Lusitania.

Question 5

Managerial motives to seek diversification include a desire to

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The answer of Managerial motives to seek diversification include a...

Question 6

The downside of synergy in a diversified firm is

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The downside of synergy in a diversified firm is the loss of flexibility. Synergy often requires coordination and integration among businesses, which may limit the ability of individual businesses to adapt to changing market conditions or pursue opportunities on their own. This can reduce flexibility and create a rigid corporate structure that may not be able to respond quickly to changes in the market or to take advantage of new opportunities as they arise.

Question 7

The Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment for furniture manufacturing. This excess capacity will be useful in

Accepted Answer

Excess capacity in plant and equipment would be useful in related diversification projects. This would allow the Cherrywood Fine Furniture Company to utilize their existing resources to manufacture new and related products, expanding their product line and potentially increasing revenue. Unrelated diversification, corporate restructuring, and multipoint competition do not necessarily require excess capacity in the same way that related diversification does.

Question 8

Of the value-neutral incentives to diversify,all of the following are internal firm incentives EXCEPT

Accepted Answer

The internal firm incentives to diversify are related to reducing overall firm risk, managing uncertain future cash flows, and improving low performance. Stricter interpretation of antitrust laws is an external incentive because it is imposed by the government or regulatory authorities to ensure competition and prevent monopolies.

Question 9

Which of the following resources are more likely to create value in the diversification process?

Accepted Answer

Tacit knowledge is a valuable resource for diversification as it enables a firm to leverage its existing capabilities and competencies to enter new markets and develop new products or services. Plant and equipment and excess capacity may not necessarily create value in the diversification process, and financial resources could be important but are not as critical as tacit knowledge.

Question 10

As the threat of corporate failure increases due to relatedness between a firm's business units,firms may decide to

Accepted Answer

As relatedness between a firm's business units increases, the risk of corporate failure also increases due to the interdependence between the units. In such a scenario, diversifying into less risky environments can help spread the risk and reduce the overall impact of failure in any one unit on the firm as a whole. The other options may not be as effective or may even exacerbate the problem. Increasing the level of retained resources may help in the short-term, but may not address the underlying issue of relatedness. Reducing the level of diversity in its investments may also increase the risk of failure. Pursuing unproven product lines may be even riskier in a scenario where relatedness is already high.

Question 11

Research suggests that
Has decreased while
Has increased possibly due to the
Restructuring that took place in the 1990s and early twenty-first century.

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The answer of Research suggests that
Has decreased while
Has increased possibly...

Question 12

In making a decision to diversify,managers should use value-creating reasons or face the risk that their firms will be acquired and they could lose their jobs. Which of the following is a value-creating reason to diversify?

Accepted Answer

Economies of scope refer to cost savings and improved efficiency that can be achieved by using shared resources or capabilities across different businesses or products within a firm. This can lead to increased profitability and value for the firm. B, desire for increased compensation, is not a value-creating reason as it only benefits the individual manager and not the firm as a whole. C, reduced managerial risk, is also not a value-creating reason as it focuses on protecting the manager's job rather than creating value for the firm. D, low performance, is not a reason to diversify but rather a signal that changes may need to be made within the existing business to improve performance.

Question 13

Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify?

Accepted Answer

Surveillance technologies are not typically considered a governance mechanism to limit managerial tendencies to over-diversify. The market for corporate control, the Board of Directors, and executive compensation practices are all common governance mechanisms used to encourage managers to make value-maximizing decisions for shareholders, including avoiding excessive diversification.

Question 14

Among the value-neutral incentives to diversify,some come from the firm's external environment while others are internal to the firm. External incentives to diversify include

Accepted Answer

External incentives to diversify include changes in antitrust regulations and tax laws. The other options are not necessarily value-neutral incentives and may not always lead to successful diversification strategies. For example, diversifying simply because other firms are doing it or because of pressure from stockholders may not align with the firm's capabilities and resources, ultimately leading to poor performance. Low performance itself may be a result of a lack of diversification, but it is not necessarily an external incentive.

Question 15

Certain regulatory changes (such as antitrust regulation and tax laws)create incentives or disincentives for diversification that

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The answer of Certain regulatory changes (such as antitrust regulation...

Question 16

Free cash flows are

Accepted Answer

Free cash flows are the cash flows left after all financial obligations have been met and all necessary investments in current businesses have been made. These cash flows can be used for various purposes such as paying dividends, repurchasing stocks, or investing in new businesses. They are not liquid financial assets but rather a measure of a company's ability to generate cash. Option B is incorrect as it describes retained earnings, not free cash flows. Option C is incorrect as it refers to profits resulting from a sale, not free cash flows. Option D is incorrect as capital gains taxes are not specific to dividends received from free cash flows.

Question 17

Because of the tax laws of the 1960s and 1970s,when dividends were taxed more heavily than capital gains,shareholders preferred that corporations

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The answer of Because of the tax laws of the...

Question 18

Which of the following firms would be the most likely to be a successful candidate for acquisition and restructuring?

Accepted Answer

The tire manufacturer established in 1910 has a long history and likely has established brand recognition and customer loyalty. It may also have valuable assets such as manufacturing facilities and intellectual property. These factors make it a strong candidate for acquisition and restructuring. The other options do not offer as much potential for successful restructuring due to various factors such as lack of assets, reliance on long-term relationships, and limited history.

Question 19

Synergy exists when

Accepted Answer

Synergy exists when the value created by business units working together exceeds the value the units create when working independently. This means that by combining efforts or working together, the resulting value is greater than the sum of the individual values.

Question 20

Differentiate between corporate-level and business-level strategies and give examples of each.

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The answer of Differentiate between corporate-level and business-level strategies and...

Quiz 6: Corporate-Level Strategy.