Chapter 6

Question 1

Explain what 3 resaons are that cause firms to diversify their operations?

Answer 1

Value-creating diversification: sharing activities, market power, business restructuring

Value-neutral diversification: tax laws, uncertain future-cash flows, low performance

Value-reducing diversification: managerial employment risk, increasing managerial compensation

Question 2

Discuss what motives might encourage managers to over-diversify their firm

Answer 2

• increase compensation
• reduced management risk
• to diversify a chefs own employment risk