Chapter 8 - Test 3 Flashcards
The most common organization structure for implementing a corporate diversification strategy is the U-form.
f
Another name for the M-form is the multidivisional structure.
t
In the multidivisional structure, each business that the firm engages in is managed through a division.
t
The divisions in an M-form organization are true profit-and-loss centers.
t
All firms that use the multidivisional structure use the same criteria for defining the boundaries of profit-and-loss centers.
f
Divisions in an M-form organization should be large enough to represent identifiable business entities but small enough so that a division general manager can manage each one effectively.
t
Divisions in an M-form organization should be large enough to represent identifiable business entities but small enough so that a division general manager can manage each one effectively.
f
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 the interests of its equity holders.
t
Whenever one party to an exchange delegates decision-making authority to a second party, an agency relationship has been created between these parties.
t
In an agency relationship the party delegating the decision-making authority is called the agent.
f
One common agency problem occurs when managers decide to take some of a firm’s capital and invest it in managerial perquisites that do not add economic value to the firm but that do directly benefit those managers.
t
In an M-form organization the role of the board of directors is to formulate corporate strategies consistent with equity holders’ interests and to assure strategy implementation.
f
In principle, only the CEO and the president report to the board of directors while other senior managers report only to the CEO.
f
Research on outside members of boards of directors tends to show that outside directors, as compared to insiders, tend to focus less on monitoring a firm’s economic performance than on other measures of firm performance.
f
Research has shown that separating the roles of CEO and board chair is positively correlated with firm performance when firms operated in high-growth and very complex environments.
t
To the extent that a board of directors begins to operate a business on a day-to-day basis, it goes beyond its capabilities.
t
A board of directors typically consists of 15 to 30 individuals drawn from a firm’s top management group and from individuals outside the firm.
f
The title chairman of the board often, but not always, identifies the firm’s senior executive.
f
Institutional owners are usually pension funds, mutual funds, insurance companies, or other groups of investors that have joined together to manage their investments.
t
In 1970, institutions owned 62 percent of the equity traded in the United States; by 1990, institutions owned 48 percent of this equity and by 2002, they owned only 32 percent of this equity.
f
The senior executive in an M-form organization has two responsibilities: strategy formulation and strategy implementation.
t
In an M-form organization, the chief executive officer is solely responsible for strategy implementation.
f
Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm.
f
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.
t
Most accounting measures of divisional performance focus on long-term benefits and minimize the possibility of a short-term bias.
f
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.
t
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.
f
The most popular economically oriented measure of division performance in a diversified firm is economic value added.
t
By adjusting for a division’s earning 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.
t
If a well-managed diversified firm uses both accounting and economic measures, it will be able to unambiguously evaluate divisional performance.
f
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 division in that firm.
f
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.
t
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.
t
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.
f
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.
t
Traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firm’s economic performance.
t
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.
f
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.
f
Transfer prices should equal opportunity cost.
t
Corporate spin-offs are different from asset divestitures.
t
The most common organizational structure for implementing a corporate diversification strategy is the \_\_\_\_\_\_\_\_ structure. A) matrix B) U-form C) M-form D) functional
c
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.
b
The divisions of an M-form organization are true A) profit-and-loss centers. B) functional units. C) matrix teams. D) organic structures.
a
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.
d
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.
b
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.
a
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
c
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.
a
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.
d
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.
c
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
a
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
d
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%
c
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.
b
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.
c
In 1970, institutions owned \_\_\_\_\_\_\_\_ percent of the equity traded in the United States and by 2002 they owned \_\_\_\_\_\_\_\_ percent of the equity traded in the United States. A) 32; 62 B) 62; 32 C) 48; 62 D) 32; 48
a
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.
d
The two responsibilities of the senior executive in an M-form organization are
A) strategy formulation and strategy implementation.
B) strategy formulation and strategic control.
C) strategic control and strategy implementation.
D) strategy implementation and differentiation.
a
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
c
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
a
The divided loyalties that divisional staff managers have between corporate staff managers and functional managers is potentially the most problematic in \_\_\_\_\_\_\_\_ staff functions. A) marketing B) accounting C) logistics D) production
b
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.
c
\_\_\_\_\_\_\_\_ 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
a
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.
d
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
b
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
a
\_\_\_\_\_\_\_\_ 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
c
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.
d
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.
a
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.
b
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
d
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
c
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
d
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
c
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.
b
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
d
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.
c
A \_\_\_\_\_\_\_\_ exists 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 entity. A) corporate spin-off B) franchise C) division D) subsidiary
a
IPO stands for A) internal product offering. B) internal price orders. C) international product orders. D) initial public offering.
d
Transfer pricing should equal A) selling price. B) opportunity cost. C) total cost. D) marginal cost
b
Which organizational structure is SpandoCorp using? A) U-form B) Matrix C) M-form D) Functional
c
Grace McKenna is best described as a(n) \_\_\_\_\_\_\_\_ in SpandoCorp. A) senior executive B) corporate staff member C) division general manager D) institutional investor
a
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.
b
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.
d
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.
b
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.
c
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
a
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
b
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.
d
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.
a
