Question 1

What will be the result if a company which achieves a negative performance spread shrinks?&#10;A) Value opportunity forgone&#10;B) Value destruction&#10;C) Value maintenance&#10;D) Value creation

Accepted Answer

When a company with a negative performance spread shrinks, it stops investing in value-destroying activities, leading to value creation by preserving capital and potentially reallocating resources more efficiently.

Question 2

What will be the result if a company grows and achieves a negative performance spread?&#10;A) Value destruction&#10;B) Value maintenance&#10;C) Value creation&#10;D) Value opportunity forgone

Accepted Answer

Achieving a negative performance spread means that the company is not generating returns that are higher than the cost of capital, resulting in value destruction for shareholders.

Question 3

Which of the following options best defines the term 'strategic business unit'?&#10;A) A business unit which is distinguishable from other business units because it serves a defined external market in which management can conduct strategic planning in relation to products and markets&#10;B) A functional area of a business, for example production, distribution or administration&#10;C) A part of a business concerned with just one product or one market&#10;D) A division of a large firm that operates in a manner very similar to other units within the firm, thus creating internal competition

Accepted Answer

A strategic business unit is defined as a business unit that is distinguishable from other business units because it serves a defined external market where management can conduct strategic planning in relation to products and markets. It is usually an independent unit within the larger organization, with its own strategy, objectives, and resources. B, C, and D do not sufficiently capture the key characteristics of a strategic business unit.

Question 4

The strategic financial plans are planned long- term financial actions and the anticipated financial impact of those actions.

Accepted Answer

The statement is true, as strategic financial plans involve forecasting and planning long-term financial actions and their potential impact.

Question 5

Which three of the following are important aspects of the role of the corporate centre (or head office)?&#10;A) Structuring the organisation so that rules and responsibilities are clearly defined&#10;B) Ensuring that work groups act efficiently to reach targets&#10;C) Managing strategic value drivers shared by SBUs&#10;D) Portfolio planning

Accepted Answer

A) Structuring the organization is important as it helps in defining the rules and responsibilities clearly, leading to greater efficiency and effectiveness throughout the organization.
C) Managing strategic value drivers shared by SBUs is an important aspect of the corporate center as it helps in optimizing resources and capabilities across multiple business units and helps ensure consistency in strategy execution.
D) Portfolio planning is also an important role of the corporate center as it helps in ensuring that the organization's resources are allocated optimally across business units and in line with overall strategic objectives.

Question 6

In an investigation of the value creation of three products, a company found that A and B were value creating, but C was value destroying. They also found that a profile of customers identified that value creation for sales in England were value destroying, but sales in Wales and Scotland were value creating. Which two actions would you probably recommend to the company?

A) Stop sales in England
B) Increase production of C
C) Focus sales efforts in England
D) Stop production of C

Accepted Answer

Since product C is value destroying, stopping its production would be a viable option. Additionally, since sales in England are value destroying, it would be wise to stop sales in England. Therefore, the best options are A and D. Increasing production of C or focusing sales efforts in England would not address the issue of value destruction.

Question 7

What key benefit results from using value- creation profile charts to review current SBU activities?&#10;A) They identify ways of minimising returns.&#10;B) They extend the planning horizon.&#10;C) They may reveal particular product or customer categories that destroy wealth.&#10;D) They may reveal areas in which borrowing can be increased.

Accepted Answer

Value-creation profile charts help identify particular products or customer categories that may be destroying wealth, allowing for strategic changes to improve overall profitability. The other options are not key benefits of using these charts.

Question 8

Which three of the following are key roles of the corporate centre in value- based strategic organisations?&#10;A) Instructing managers in each strategic business unit on the details of operations&#10;B) Managing strategic value drivers shared by two or more strategic business units&#10;C) Providing the pervading philosophy and governing objective for all business units&#10;D) Allocating resources to those strategic business units and product and/or customer areas offering the greatest value creation while withdrawing capital from those destroying value

Accepted Answer

A) Instructing managers in each strategic business unit on the details of operations is not a key role of the corporate centre in value-based strategic organisations as this is typically the responsibility of the individual business units.

B) Managing strategic value drivers shared by two or more strategic business units is a key role of the corporate centre in value-based strategic organisations as this allows for synergies and coordination between business units.

C) Providing the pervading philosophy and governing objective for all business units is a key role of the corporate centre in value-based strategic organisations as it ensures alignment and consistency across the organisation.

D) Allocating resources to those strategic business units and product and/or customer areas offering the greatest value creation while withdrawing capital from those destroying value is a key role of the corporate centre in value-based strategic organisations as it helps to optimise the allocation of resources and drive overall value creation.

Question 9

An SBU's plans are for an investment of £0.5m, which is expected to achieve a 20 percent per annum return over 10 years, followed by returns equal to the risk- adjusted required return (15 per cent). What will be the result?

A) Value creation
B) Value opportunity forgone
C) Value destruction
D) Value maintenance

Accepted Answer

The investment is expected to achieve a return that exceeds the risk-adjusted required return, which means that the SBU is creating value for its stakeholders.

Deck 16: The Cost of Capital