Question 1

Which of the following benefits of diversification explains the idea that combining unrelated businesses can allow firms to finance projects through cross-subsidization when they previously were unable to finance the same projects externally?
A)Use of internal capital markets
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms

Accepted Answer

C

Question 2

Which Rumelt relatedness classification describes a firm that obtains between 70 and 95 percent of its annual revenues from a principal activity?
A)Conglomerated-business
B)Single-business
C)Dominant-business
D)Related-business
E)Unrelated-business

Accepted Answer

The classification that describes a firm that obtains between 70 and 95 percent of its annual revenues from a principal activity is dominant-business.

Question 3

Which of the following benefits of diversification explains the idea that a multiproduct firm is an efficient choice when the costs of doing business complicate inter-firm coordination?
A)Use of internal capital markets
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms

Accepted Answer

Economizing on transaction costs refers to the benefit of diversification when a firm is able to reduce the costs of coordinating activities across different divisions or products within the firm, compared to coordinating with external parties. This can be particularly useful when the costs of external coordination are high, such as when dealing with complex supply chains or regulatory requirements.

Question 4

Which of the following is not generally a potential benefit of diversification?
A)Control systems rewarding/penalizing division managers based on business unit objective
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms

Accepted Answer

Control systems rewarding/penalizing division managers based on business unit objective is not generally a potential benefit of diversification. It is more related to performance management and may sometimes hinder the overall benefit of diversification. The other options of economies of scale and scope, economizing on transaction costs, diversifying shareholder portfolios, and identifying undervalued firms are all potential benefits of diversification.

Question 5

Which of the following is generally a way that LBOs can help a firm realize its potential value?
A)The synergies created allow for cost savings
B)The transaction reduces the disparity between a firm's actual and potential share price
C)The acquisition reduces the likelihood of competition in the industry
D)The transaction requires debt repayment with future free cash flow leaving management no discretion over the investment of these funds
E)The buyout gives an opportunity to adjust the management structure and makeup

Accepted Answer

The answer of Which of the following is generally a...

Question 6

Who is formally charged with monitoring management to ensure any diversification or other actions increase shareholder value?
A)Firm senior executives
B)Audit division
C)Board of directors
D)SEC
E)Shareholders themselves

Accepted Answer

The board of directors is responsible for monitoring management and ensuring that their actions, including diversification, are in the best interest of the shareholders and increase shareholder value.

Question 7

After American Can's initial transition from only producing manufacturing tin cans and other metal containers (1950)to diversifying with businesses that included paper products,printing,record distribution,and direct mail marketing,what Rumelt relatedness classification best described the firm (1980)?
A)Conglomerated-business
B)Single-business
C)Dominant-business
D)Related-business
E)Unrelated-business

Accepted Answer

The Rumelt relatedness classification for American Can in 1980 would be "Unrelated-business" because the firm diversified into various industries that are not related to its original business of manufacturing tin cans and metal containers.

Question 8

By satisfying which of the following conditions can shareholders prevent management driven acquisitions?
A)If shareholders could determine which acquisitions will lead to increased profits and which will not
B)If shareholders could direct management to undertake only those acquisitions that will increase shareholder value
C)If shareholders could provide management with the appropriate steps to conduct when performing acquisitions
D)a & b
E)None of the above

Accepted Answer

Option A alone may not be sufficient as shareholders may have different opinions on what constitutes increased profits. Option B is necessary as it allows shareholders to have control over management's decisions to undertake acquisitions that increase shareholder value. Therefore, options A and B combined (option D) would be the most effective way for shareholders to prevent management-driven acquisitions. Option C is not necessary as it doesn't directly provide shareholders with control over management's acquisition decisions.

Question 9

Which of the following is not a way managers generally benefit from acquisitions?
A)Increased compensation
B)Consolidation of other senior executives
C)Shielding against risk
D)Political power
E)Social prominence

Accepted Answer

Consolidation of other senior executives is not typically considered a direct benefit to managers from acquisitions. Instead, benefits often include increased compensation, risk mitigation, enhanced political power, and greater social prominence, all of which are directly advantageous to the managers themselves. Consolidation of senior executives is more of an organizational outcome than a personal benefit to individual managers.

Question 10

Examining which of the following is broadly considered one of the easiest ways to measure diversifying activity?
A)Joint Ventures
B)Mergers and acquisitions
C)Internal Business Development
D)Strategic Alliances
E)Collaborative agreements

Accepted Answer

Mergers and acquisitions are broadly considered one of the easiest ways to measure diversifying activity because they involve the combination or acquisition of companies to enter new markets or sectors, which is a direct and quantifiable method of diversification.

Question 11

Which of the following is generally a way that LBOs can help a firm realize its potential value?
A)The synergies created allow for cost savings
B)The transaction reduces the disparity between a firm's actual and potential share price
C)The reduction in the number of shares outstanding makes it possible to give a firm's management a large equity share
D)The acquisition reduces the likelihood of competition in the industry
E)The buyout gives an opportunity to adjust the management structure and makeup

Accepted Answer

The answer of Which of the following is generally a...

Question 12

What diversification benefit argument is countered with Lamont's study indicating that oil firm investments in their nonoil subsidiaries fell sharply after oil price drops in the 1980s?
A)Use of internal capital markets
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms

Accepted Answer

Lamont's study suggests that the use of internal capital markets, which is a diversification benefit, was ineffective as oil firms reduced investments in nonoil subsidiaries when oil prices dropped, indicating a lack of efficient capital allocation within diversified firms.

Question 13

What measure,that depends on how much of a firm's revenues are attributable to product market activities that have shared technological characteristics,production characteristics,or distribution channels,is used to determine how diversified a firm is at a given time?
A)Integration level
B)Rumelt score
C)Conglomerate level
D)Activity share
E)Relatedness

Accepted Answer

The measure described in the question is relatedness, which assesses the degree to which a firm's various businesses share technological, production, or distribution characteristics. None of the other options listed refer specifically to this measure.

Question 14

Which of the following benefits of diversification explains the idea that corporate diversification can provide situations where an acquiring firm determines the stock price for firm they intend to acquire is too low?
A)Use of internal capital markets
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms

Accepted Answer

Identifying undervalued firms can provide the opportunity for an acquiring firm to determine that the stock price for a firm they intend to acquire is too low, allowing them to make a profitable acquisition.

Question 15

As is the case with most mergers what happened to target firm Gillette's stock and acquiring form P&G's stock on the day their merger was announced?
A)Both stocks rose
B)Both stocks dropped
C)Gillette's stock rose and P&G's stock fell
D)P&G's stock rose and Gillette's stock fell
E)P&G's stock fell and Gillette's stock split

Accepted Answer

Typically, in mergers, the target firm's stock (Gillette) rises due to the premium offered by the acquiring firm, while the acquiring firm's stock (P&G) may fall due to concerns about the cost and integration challenges.

Question 16

What force does Manne indicate constrains the actions of managers so that they stay focused on the goals of owners?
A)Market for corporate control
B)SEC
C)Corporate board
D)Corporate governance
E)CEO

Accepted Answer

Manne indicates that the market for corporate control is the force that constrains managers to stay focused on the goals of owners as it incentivizes them to manage the company in a way that increases shareholder value to avoid being taken over by a different owner. The other options listed may also play a role in corporate governance, but they do not directly address the force that constrains managers.

Question 17

Which of the following is a term that can best be used to describe a broadly diversified firm?
A)Integrated
B)Merged
C)Mixed
D)Conglomerate
E)Multifaceted

Accepted Answer

A conglomerate is a term used to describe a broadly diversified firm that operates in multiple industries or sectors. Conglomerates often have a diverse portfolio of businesses that may not be related to one another, and they may operate in different geographic regions as well.

Question 18

What institution within a firm must fail on some level for managers to be motivated to acquire another firm for the purposes of increasing their own compensation,shielding themselves against risk,or gaining prominence by running a larger firm?
A)Legal department
B)Corporate board
C)Mergers and acquisitions program
D)Firm bonus schedule
E)Corporate governance

Accepted Answer

Corporate governance must fail or be ineffective for managers to be motivated to acquire another firm for self-serving reasons such as increasing their own compensation, shielding themselves against risk, or gaining prominence by running a larger firm. Effective corporate governance should align the interests of the managers with those of the shareholders, preventing managers from pursuing acquisitions that do not benefit the company as a whole.

Question 19

Which of the following benefits of diversification explains the idea that mergers are more likely when there is an expectation of positive changes in market share?
A)Use of internal capital markets
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms

Accepted Answer

Economies of scale and scope refer to the cost savings that come from combining resources and operations. If there is an expectation of positive changes in market share, a merger can enable a company to achieve greater economies of scale and scope and ultimately improve profitability. Thus, this benefit of diversification explains why mergers may be more appealing in such situations.

Question 20

Which of the following benefits of diversification explains the idea that a firm with many business lines can reduce swings in value because it receives only a small percentage of its revenue from any one of those business lines?
A)Use of internal capital markets
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms

Accepted Answer

Diversifying shareholder portfolios refers to the idea that a firm with many business lines can reduce swings in value because it receives only a small percentage of its revenue from any one of those business lines. This allows shareholders to diversify their portfolios and reduce risk.

Quiz 7: Diversificationpart Threemarket and Competitive Analysis

Which of the following benefits of diversification explains the idea that combining unrelated businesses can allow firms to finance projects through cross-subsidization when they previously were unable to finance the same projects externally?

Which Rumelt relatedness classification describes a firm that obtains between 70 and 95 percent of its annual revenues from a principal activity?

Which of the following benefits of diversification explains the idea that a multiproduct firm is an efficient choice when the costs of doing business complicate inter-firm coordination?

Which of the following is not generally a potential benefit of diversification?

Which of the following is generally a way that LBOs can help a firm realize its potential value?

Who is formally charged with monitoring management to ensure any diversification or other actions increase shareholder value?

By satisfying which of the following conditions can shareholders prevent management driven acquisitions?

Which of the following is not a way managers generally benefit from acquisitions?

Examining which of the following is broadly considered one of the easiest ways to measure diversifying activity?

Which of the following is generally a way that LBOs can help a firm realize its potential value?

What diversification benefit argument is countered with Lamont's study indicating that oil firm investments in their nonoil subsidiaries fell sharply after oil price drops in the 1980s?

What measure,that depends on how much of a firm's revenues are attributable to product market activities that have shared technological characteristics,production characteristics,or distribution channels,is used to determine how diversified a firm is at a given time?

Which of the following benefits of diversification explains the idea that corporate diversification can provide situations where an acquiring firm determines the stock price for firm they intend to acquire is too low?

As is the case with most mergers what happened to target firm Gillette's stock and acquiring form P&G's stock on the day their merger was announced?

What force does Manne indicate constrains the actions of managers so that they stay focused on the goals of owners?

Which of the following is a term that can best be used to describe a broadly diversified firm?

What institution within a firm must fail on some level for managers to be motivated to acquire another firm for the purposes of increasing their own compensation,shielding themselves against risk,or gaining prominence by running a larger firm?

Which of the following benefits of diversification explains the idea that mergers are more likely when there is an expectation of positive changes in market share?

Which of the following benefits of diversification explains the idea that a firm with many business lines can reduce swings in value because it receives only a small percentage of its revenue from any one of those business lines?