Q&A Hero

Q: A(n) ________ exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services. A) vertical market B) strategic alliance C) initial public offering D) market transaction

Q: In the computer technology-based industries, over ________ alliances were created between 2001 and 2005. A) 5,700 B) 1,200 C) 2,200 D) 3,100

Q: When the probability of cheating in a cooperative relationship is lowest, a joint venture is usually the preferred form of cooperation.

Q: In comparison to strategic alliances, joint ventures increase the threat of cheating by partners.

Q: Sometimes the value of cheating in a joint venture is sufficiently large that a firm cheats even though doing so hurts the joint venture and forecloses future opportunities.

Q: In general, contracts are sufficient to resolve all the problems associated with cheating in an alliance.

Q: The primary purpose of organizing a strategic alliance is to enable partners in the alliance to gain all the benefits associated with cooperation while minimizing the probability that cooperating firms will cheat on their cooperative agreements.

Q: An alliance will be preferred to an acquisition when there are legal constraints on acquisitions.

Q: Transaction cost economics suggests that going it alone is not a substitute for strategic alliances since they are best chosen only when other alternatives are not viable.

Q: Discuss the importance of compensation policies in diversified firms and identify the CEO compensation package that most closely aligns the interests of the CEO with those of stockholders.

Q: Discuss the role of transfer pricing systems in an M-form organization, identify difficulties with setting optimal prices, and identify four alternative transfer pricing schemes.

Q: Discuss the relationship between accounting methods of measuring divisional performance and economic methods, identify the formula used for calculating economic value added, and discuss methods for adjusting accounting earnings and the importance of making these adjustments.

Q: Discuss the role of accounting measures of divisional performance, identify three different standards of comparison that can be used when evaluating the accounting performance of a division along with the strengths and weaknesses of each standard, and describe the potential weaknesses of accounting measures of divisional performance.

Q: Discuss the role of division general managers in an M-form organization and compare and contrast this role with that of senior executives in U-form organizations.

Q: Identify the responsibilities of the senior executive in an M-form organization and discuss the three different roles in the office of the president and the responsibilities of each role.

Q: Discuss the role of institutional investors in an M-form organization. In addressing this question, be sure to identify who institutional investors are and discuss trends in institutional ownership and whether institutional investors encourage managers to act in ways that are consistent with the interests of equity holders or if institutional investors are overly myopic.

Q: Describe the nature and role of the board of directors in an M-form organization and discuss who generally serves on the board, the role of outside members on a board of directors and when the roles of CEO and chairman of the board should be combined or separated.

Q: Define what constitutes an agency relationship and the roles of the principal and the agent; discuss how the agency relationship is reflected in the context of corporate diversification and when the agency relationship can be effective; and identify two common agency problems.

Q: Describe the multidivisional, or M-form structure, and how it is used to implement a corporate diversification strategy.

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. If SpandoCorp decides to use the method of allocating capital where each project receives funding on its merit and not because it received funding the previous year, it is using A) zero-based budgeting. B) corporate budgeting. C) centralized budgeting D) coordinated budgeting.

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. If SpandoCorp's board of directors wanted to ensure that changes in the CEO's compensation would be closely linked to changes in the firm's performance, it should A) use a compensation package that includes only a salary for the CEO. B) use a compensation package that includes a salary and a cash bonus for the CEO. C) use a compensation package the includes a salary, a cash bonus and stock options that represent only a relatively small percentage of the CEO's total compensation package. D) use a compensation package that includes a salary and stock options that represent a relatively substantial percentage of the CEO's total compensation package.

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. If the bulk materials division of SpandoCorp sold its reams of Spandex to the military division and set the transfer price of these reams equal to the bulk materials actual cost of production, SpandoCorp would be using the ________ transfer pricing scheme. A) exchange autonomy B) mandated full cost C) mandated market based D) dual pricing

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. If SpandoCorp used a ________ budgeting process, it would assume that no project would receive funding for the future simply because it was funded in the past and would require each project to stand on its own merits each year to be included in a list of important projects that the firm can afford to fund. A) zero-based B) cost plus C) dynamic D) traditional

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. If SpandoCorp wanted to measure the performance of its divisions with a method that would minimize any potential short-term bias, it should use a(n) A) hurdle rate based measure of divisional performance. B) divisional budget based measure of performance. C) economic value added measure of divisional performance. D) measure of performance based on the average level of profitability of firms in a division's industry.

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. If Todd Hienz were the chief operating officer for SpandoCorp, his responsibilities would include A) supervision of the board of directors in its monitoring role. B) strategy implementation. C) strategy formulation. D) strategy control.

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. Kelly Rae's position is SpandoCorp is best described as a(n) A) institutional investor. B) senior executive. C) division general manager. D) member of the board of directors.

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. Wells Tucker's position in SpandoCorp is best described as A) a division general manager. B) a member of the corporate staff. C) the senior executive. D) a member of the board of directors.

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. Grace McKenna is best described as a(n) ________ in SpandoCorp. A) senior executive B) corporate staff member C) division general manager D) institutional investor

Q: SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. Which organizational structure is SpandoCorp using? A) U-form B) matrix C) M-form D) functional

Q: Transfer pricing should equal A) selling price. B) opportunity cost. C) total cost. D) marginal cost.

Q: Which of the following is not a reason that diversified firms might spin off businesses? A) Management may require specific skills that are not present. B) Anticipated economies of scope may not be realized. C) Funding may be needed for other businesses. D) The business is too related to other firm businesses.

Q: A business unit within a diversified firm may be sold to the public through a(n) A) corporate spin-off. B) liquidation. C) IPO. D) harvest strategy.

Q: A(n) ________ occurs when a large, typically diversified firm divests itself of a business in which it has historically been operating and the divested business operates as an independent unit. A) harvest B) liquidation C) initial public offering D) corporate spin-off

Q: Which of the following statements regarding CEO compensation is accurate? A) Differences in CEO cash compensation are very responsive to differences in firm performance. B) If a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm, changes in compensation are closely linked with changes in firm performance. C) If a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm, changes in compensation are not closely linked with changes in firm performance. D) If a substantial percentage of a CEO's compensation comes in the form of salary, changes in compensation can be expected to be closely linked with changes in firm performance.

Q: Under which transfer pricing scheme is the transfer price set equal to the selling division's actual cost of production or set equal to the cost of production if the selling division were operating at maximum efficiency? A) exchange autonomy B) mandated full cost C) mandated market based D) dual pricing

Q: In a multidivisional company, one division "sells" its products or services to a second division for a(n) ________, which is set by a firm's corporate management to accomplish corporate objectives. A) allocation price B) transfer cost C) market price D) transfer price

Q: In ________ budgeting, corporate executives create a list of all capital allocation requests from divisions in a firm, rank them from "most important" to "least important" and then fund all the projects a firm can afford, given the amount of capital that is available and no project receives funding simply because it was funded in the past. A) cost-plus B) activity-based C) zero-based D) revenue-based

Q: When adjusting a division's accounting earnings for use in the economic value added calculations, R&D spending is usually A) subtracted from the division's performance. B) depreciated over the life of the average R&D projected and subtracted from the division's performance. C) amortized over the life of the average R&D projected and added back to the division's performance. D) added back into the division's performance.

Q: If a division of a multidivisional firm has adjusted accounting earnings of $10 million, a weighted average cost of capital of 10% and a total capital employed by the division of $50 million, the division has an EVA of A) $25 million. B) $5 million. C) $15 million. D) $20 million.

Q: Most accounting measures of divisional performance have a common limitation in that they A) have a short-term bias. B) are costly to implement. C) are difficult to interpret. D) have a long-term bias.

Q: Which of the following is a weakness of using a hurdle rate as a standard of evaluating the performance of a division? A) The process is time-consuming. B) The process is fraught with political intrigue. C) This approach lets other firms determine what is and what is not excellent performance for a division within a diversified firm. D) The use of such a single standard ignores important differences in performance that might exist across divisions.

Q: ________ is an economic measure of divisional performance. A) Return on assets B) Return on a division's sales C) Economic value added D) A division's growth rate

Q: When the cost of services from a shared activity is ________ the cost of comparable services provided by a division itself or by an outside supplier than the division, general managers have a strong incentive ________. A) less than; to use the services of shared activities B) greater than; to use the services of shared activities C) less than; to use the services of an outside supplier D) equal to; to use the services of an outside supplier

Q: Rather than having profit-and-loss responsibilities, ________ are assigned a budget and manage their operations to that budget. A) profit centers B) cost centers C) operation centers D) functional centers

Q: When compared to the strategy implementation responsibilities of senior executives in U-form organizations, when implementing strategy, division general managers in M-form organizations A) tend to have to deal with less conflict. B) have to compete for external capital funding. C) tend to have to deal with substantially more conflict. D) must cooperate with other divisions to exploit corporate economies of scope.

Q: ________ have full profit-and-loss responsibility and typically have multiple functional managers reporting to them. A) Division general managers B) Corporate staff managers C) Senior executives D) Shared activity managers

Q: In an M-form organization, the management of day-to-day operations is delegated to A) divisional general managers and corporate staff managers. B) corporate staff managers and functional managers who report to corporate staff managers. C) divisional general managers and functional managers who report to division general managers. D) the board of directors and corporate staff managers who report to the board of directors.

Q: The divided loyalties that divisional staff managers have between corporate staff managers and functional managers are potentially the most problematic in ________ staff functions. A) marketing B) accounting C) logistics D) production

Q: The primary responsibility of the ________ is to provide information about the firm's external and internal environments to the firm's senior executive. A) corporate staff B) board of directors C) division general managers D) shared activity managers

Q: Which role in the office of the president is responsible for strategy implementation? A) chairman of the board B) chief executive officer C) chief operating officer D) chief strategist

Q: Which of the following statements regarding institutional investors is accurate? A) Institutional investors tend to be more interested in maximizing the short-term value of their portfolios than in the long-term performance of firms in those portfolios. B) High levels of institutional ownership are negatively related to the level of R&D in a firm. C) High levels of institutional ownership have a strong, positive relationship with the level of R&D in a firm. D) High levels of institutional ownership lead firms to sell strategically unrelated businesses.

Q: In 1970, institutions owned ________ percent of the equity traded in the United States and by 2005 they owned ________ percent of the equity traded in the United States. A) 32; 59 B) 62; 32 C) 48; 62 D) 32; 38

Q: The senior executive (the president or CEO) in an M-form organization has two responsibilities: A) budgeting and accounting. B) budgeting and mission setting. C) strategy formulation and strategy implementation. D) strategy formulation and budgeting.

Q: Supervision of the board of directors in its monitoring role is the responsibility of A) the CEO. B) the chairman of the board. C) the chief operating officer. D) the president.

Q: In 2005, what percentage of the equity traded in the United States was owned by institutional investors? A) 20% B) 38% C) 59% D) 69%

Q: The ________ is a subcommittee of the board of directors that maintains the relationship between the firm and external capital markets. A) nominating committee B) audit committee C) personnel and compensation committee D) finance committee

Q: The ________ is the subcommittee of the board of directors that is responsible for ensuring the accuracy of accounting and financial statements. A) audit committee B) finance committee C) nominating committee D) personnel and compensation committee

Q: In examining the question of whether the roles of CEO and chairman should be combined, empirical research on this question suggests A) that combining these roles is always positively related with firm performance. B) that separating these roles is always positively related with firm performance. C) that combining these roles is positively correlated with firm performance when the firm operates in slow-growth and simple competitive environments. D) that separating these roles is positively correlated with firm performance when the firm operates in slow-growth and simple competitive environments.

Q: Which of the following statements regarding outside members of boards of directors is accurate? A) Outside directors, as compared to insiders, tend to focus less on monitoring a firm's economic performance than on other measures of firm performance and are more likely than insider members to dismiss CEOs following poor performance. B) Outside directors, as compared to insiders, tend to focus less on monitoring a firm's economic performance than on other measures of firm performance and are less likely than insider members to dismiss CEOs following poor performance. C) Outside directors, as compared to insiders, tend to focus more on monitoring a firm's economic performance than on other measures of firm performance and are less likely than insider members to dismiss CEOs following poor performance. D) Outside directors, as compared to insiders, tend to focus more on monitoring a firm's economic performance than on other measures of firm performance and are more likely than insider members to dismiss CEOs following poor performance.

Q: A board of directors typically consists of A) 10 to 15 individuals drawn from a firm's top management group and from individuals outside the firm. B) 10 to 15 individuals drawn exclusively from a firm's top management group. C) 10 to 15 individuals drawn exclusively from individuals outside the firm. D) 10 to 15 individuals drawn from all stakeholder groups associated with the firm.

Q: Which component of the M-form structure evaluates the firm's decision making to ensure that it is consistent with the interests of equity holders? A) senior executives B) corporate staff C) board of directors D) division general managers

Q: Two common agency problems include A) managers investing some of a firm's capital in managerial perquisites that do not add economic value to a firm and managerial risk aversion. B) managers not investing enough of a firm's capital in managerial perquisites and managerial risk aversion. C) managers investing some of a firm's capital in managerial perquisites that do not add economic value to a firm and managerial risk seeking. D) managers not investing enough of a firm's capital in managerial perquisites and managerial risk seeking.

Q: In an agency relationship, the party that delegates decision-making authority to another individual is known as the A) stakeholder. B) principal. C) agent. D) stockholder.

Q: The M-form structure is designed to create checks and balances for managers that increase the probability that a diversified firm will be managed in ways consistent with A) the interests of all of its stakeholders. B) an exclusively short-term perspective. C) an exclusively long-term perspective. D) the interests of its equity holders.

Q: The divisions of an M-form organization are true A) profit-and-loss centers. B) functional units. C) matrix teams. D) organic structures.

Q: In a multidivisional structure, each business that the firm engages in is managed through a A) product line. B) division. C) geographic unit. D) function.

Q: The most common organizational structure for implementing a corporate diversification strategy is the ________ structure. A) matrix B) U-form C) M-form D) functional

Q: Corporate spin-offs are different from asset divestitures.

Q: Transfer prices should equal opportunity cost.

Q: 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.

Q: 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.

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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

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

Q: 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.

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