Question 1

Corporate spin-offs are different from asset divestitures.

Accepted Answer

Corporate spin-offs involve the creation of a new, independent company from an existing business unit of a larger parent company, while asset divestitures involve the sale or transfer of specific assets, such as a product line or subsidiary, from a company.

Question 2

Most accounting measures of divisional performance focus on long-term benefits and minimize the possibility of a short-term bias.

Accepted Answer

Most accounting measures of divisional performance focus on short-term benefits such as profit margins, return on investment, and earnings per share, which can create a short-term bias. While some of these measures also consider long-term benefits like market share growth and customer satisfaction, they are primarily geared towards assessing short-term financial performance.

Question 3

Economic measures of divisional performance in a diversified firm compare a division's performance with a firm's cost of capital and these measures increase the potential for gaming, which is generally minimized by accounting measures.

Accepted Answer

Economic measures of divisional performance are designed to align with the firm's cost of capital and reduce gaming by focusing on value creation, whereas accounting measures can be more susceptible to manipulation.

Question 4

Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm.

Accepted Answer

While accounting measures such as revenue and profit are important in measuring divisional performance, it is also important to consider non-financial measures such as customer satisfaction and employee engagement. Additionally, some divisions may have different goals and objectives that cannot be accurately measured through accounting measures alone. Therefore, a combination of accounting and non-financial measures should be used to accurately measure the performance of divisions within a diversified firm.

Question 5

The greatest risk associated with treating shared activities as profit centers is that divisions may choose to obtain no services from the shared activities.

Accepted Answer

When shared activities are treated as profit centers, divisions may see them as a cost and decide not to obtain any services from them, which can lead to inefficiencies and suboptimal results for the organization as a whole.

Question 6

Economic methods of divisional performance in a diversified firm build on accounting methods but adjust those methods to incorporate short-term investments that may generate long-term benefits.

Accepted Answer

Economic methods of divisional performance take into consideration both short-term and long-term investments and their potential benefits, which goes beyond traditional accounting methods. Therefore, the statement is true.

Question 7

Transfer prices should equal opportunity cost.

Accepted Answer

According to economic theory, transfer prices should equal the opportunity cost of production within the respective units of a company. This ensures that resources are allocated efficiently, and helps to prevent distortions in the market. Therefore, transfer prices that are equal to the opportunity cost of production are seen as fair and reasonable.

Question 8

The senior executive in an M-form organization has two responsibilities: strategy formulation and strategy implementation.

Accepted Answer

The senior executive in an M-form (multidivisional) organization has two main responsibilities: formulating the overall corporate strategy and overseeing the implementation of that strategy across the various divisions or business units.

Question 9

Traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firm's economic performance.

Accepted Answer

Traditional compensation structures for managers in diversified firms have often included bonuses and stock options that were not directly tied to the company's financial performance. However, in recent years there has been a trend towards linking executive pay more closely to firm performance.

Question 10

Intermediate products or services are those products or services that are produced in one division of a diversified firm that are used as inputs by another division.

Accepted Answer

Intermediate products or services are defined as products or services that are produced by one division of a company and used as inputs by another division of the same company. They are meant to be used or consumed within the same company rather than being sold to external customers.

Question 11

By adjusting for a division's earnings and accounting for the cost of investing in a division, economic value added is a much more accurate estimate of a division's economic performance than are traditional accounting measures of performance.

Accepted Answer

Economic value added (EVA) takes into account the cost of capital invested in a division and adjusts for its earnings. This provides a more accurate picture of the division's economic performance than traditional accounting measures such as profit or return on investment. Therefore, the statement is true.

Question 12

If institutional investors are biopic, they should influence firms to invest in relatively less R&D.

Accepted Answer

Institutional investors, particularly long-term investors, tend to prioritize firms that invest in long-term growth and sustainability. Research and development (R&D) is often seen as a key driver of future growth, so institutional investors are more likely to encourage firms to invest in R&D rather than less.

Question 13

In choosing which transfer pricing system to use, a firm should be less concerned about finding the "right" transfer-pricing mechanism and be more concerned about choosing a transfer-pricing policy that creates the fewest management problems.

Accepted Answer

The statement is true. Ultimately, the goal of a transfer pricing policy is to facilitate the efficient operation of the multinational corporation, and the mechanism used should be one that causes the fewest disruptions within the organization. Therefore, the focus should be on choosing a policy that works best in the specific circumstances of the company rather than seeking the "perfect" transfer pricing system.

Question 14

One of the strengths of using a hurdle rate to measure the performance of divisions in a diversified firm is that if the corporation has a single hurdle rate, there is little ambiguity about the performance objectives of divisions.

Accepted Answer

A single hurdle rate provides a clear and consistent performance target for all divisions within a corporation, making it easier to measure and compare their performance. This reduces ambiguity and ensures that all divisions are working towards the same goal.

Question 15

It is unusual for a diversified firm to change its transfer-pricing mechanisms every few years in an attempt to find the "right" transfer-pricing mechanism.

Accepted Answer

It is not uncommon for diversified firms to change their transfer-pricing mechanisms periodically to adapt to changing market conditions and improve efficiency. However, changing the mechanism every few years in search of the "right" one would not be a common practice. Once an effective transfer-pricing mechanism is found, it is more likely to be maintained over a longer period.

Question 16

An important study on executive compensation found that differences in CEO cash compensation is not very responsive to differences in firm performance even if a substantial percentage of the CEO's compensation came in the form of stock and stock options in the firm.

Accepted Answer

The answer of An important study on executive compensation found...

Question 17

In a diversified firm, market prices are set by a firm's corporate management to accomplish corporate objectives while transfer prices are determined by the market forces of supply and demand.

Accepted Answer

In a diversified firm, both market prices and transfer prices are determined by corporate management based on their objectives for the different business units within the firm. Market forces of supply and demand do not necessarily determine transfer prices as they may involve transactions between different departments or subsidiaries within the same firm.

Question 18

In zero-based budgeting, each project has to stand on its own merits each year by being included among the important projects that a firm can afford to fund and no project receives funding for the future simply because it received funding in the past.

Accepted Answer

This statement accurately describes the concept of zero-based budgeting. The approach requires each project to be evaluated and justified each year based on its potential impact and benefits, rather than automatically receiving funding simply because it was funded in the past.

Question 19

To the extent that a firm exploits real economies of scope in implementing a diversification strategy, it will be able to unambiguously evaluate the performance of individual divisions in that firm.

Accepted Answer

This statement is false. Real economies of scope refer to the cost savings and benefits a company achieves by operating in multiple markets or producing multiple products. Evaluating the performance of individual divisions in such a scenario may be difficult as the benefits and costs are shared across the firm. Therefore, it may not be unambiguous to evaluate the performance of individual divisions in a diversified firm.

Question 20

If a well-managed diversified firm uses both accounting and economic measures, it will be able to unambiguously evaluate divisional performance.

Accepted Answer

Using both accounting and economic measures can provide a more comprehensive view, but it may not always lead to unambiguous evaluations due to differences in measurement focus, potential biases, and the complexity of integrating these measures.

Quiz 8: Organizing to Implement Corporate Diversification