Chapter 8 - Test 3

Question 1

The most common organization structure for implementing a corporate diversification strategy is the U-form.

Answer 1

f

Question 2

Another name for the M-form is the multidivisional structure.

Answer 2

t

Question 3

In the multidivisional structure, each business that the firm engages in is managed through a division.

Answer 3

t

Question 4

The divisions in an M-form organization are true profit-and-loss centers.

Answer 4

t

Question 5

All firms that use the multidivisional structure use the same criteria for defining the boundaries of profit-and-loss centers.

Answer 5

f

Question 6

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.

Answer 6

t

Question 7

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.

Answer 7

f

Question 8

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.

Answer 8

t

Question 9

Whenever one party to an exchange delegates decision-making authority to a second party, an agency relationship has been created between these parties.

Answer 9

t

Question 10

In an agency relationship the party delegating the decision-making authority is called the agent.

Answer 10

f

Question 11

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.

Answer 11

t

Question 12

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.

Answer 12

f

Question 13

In principle, only the CEO and the president report to the board of directors while other senior managers report only to the CEO.

Answer 13

f

Question 14

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.

Answer 14

f

Question 15

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.

Answer 15

t

Question 16

To the extent that a board of directors begins to operate a business on a day-to-day basis, it goes beyond its capabilities.

Answer 16

t

Question 17

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.

Answer 17

f

Question 18

The title chairman of the board often, but not always, identifies the firm’s senior executive.

Answer 18

f

Question 19

Institutional owners are usually pension funds, mutual funds, insurance companies, or other groups of investors that have joined together to manage their investments.

Answer 19

t

Question 20

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.

Answer 20

f

Question 21

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

Answer 21

t

Question 22

In an M-form organization, the chief executive officer is solely responsible for strategy implementation.

Answer 22

f

Question 23

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

Answer 23

f

Question 24

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.

Answer 24

t

Question 25

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

Answer 25

f

Question 26

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.

Answer 26

t

Question 27

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.

Answer 27

f

Question 28

The most popular economically oriented measure of division performance in a diversified firm is economic value added.

Answer 28

t

Question 29

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.

Answer 29

t

Question 30

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

Answer 30

f

Question 31

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.

Answer 31

f

Question 32

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.

Answer 32

t

Question 33

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.

Answer 33

t

Question 34

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.

Answer 34

f

Question 35

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.

Answer 35

t

Question 36

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

Answer 36

t

Question 37

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.

Answer 37

f

Question 38

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.

Answer 38

f

Question 39

Transfer prices should equal opportunity cost.

Answer 39

t

Question 40

Corporate spin-offs are different from asset divestitures.

Answer 40

t

Question 41

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

Answer 41

c

Question 42

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.

Answer 42

b

Question 43

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

Answer 43

a

Question 44

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.

Answer 44

d

Question 45

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.

Answer 45

b

Question 46

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.

Answer 46

a

Question 47

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

Answer 47

c

Question 48

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.

Answer 48

a

Question 49

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.

Answer 49

d

Question 50

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.

Answer 50

c

Question 51

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

Answer 51

a

Question 52

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

Answer 52

d

Question 53

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%

Answer 53

c

Question 54

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.

Answer 54

b

Question 55

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.

Answer 55

c

Question 56

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

Answer 56

a

Question 57

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.

Answer 57

d

Question 58

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.

Answer 58

a

Question 59

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

Answer 59

c

Question 60

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

Answer 60

a

Question 61

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

Answer 61

b

Question 62

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.

Answer 62

c

Question 63

\_\_\_\_\_\_\_\_ 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

Answer 63

a

Question 64

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.

Answer 64

d

Question 65

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

Answer 65

b

Question 66

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

Answer 66

a

Question 67

\_\_\_\_\_\_\_\_ 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

Answer 67

c

Question 68

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.

Answer 68

d

Question 69

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.

Answer 69

a

Question 70

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.

Answer 70

b

Question 71

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

Answer 71

d

Question 72

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

Answer 72

c

Question 73

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

Answer 73

d

Question 74

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

Answer 74

c

Question 75

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.

Answer 75

b

Question 76

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

Answer 76

d

Question 77

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.

Answer 77

c

Question 78

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

Answer 78

a

Question 79

IPO stands for
A) internal product offering.
B) internal price orders.
C) international product orders.
D) initial public offering.

Answer 79

d

Question 80

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

Answer 80

b

Question 81

Which organizational structure is SpandoCorp using?
A) U-form
B) Matrix
C) M-form
D) Functional

Answer 81

c

Question 82

Grace McKenna is best described as a(n) \_\_\_\_\_\_\_\_ in SpandoCorp.
A) senior executive
B) corporate staff member
C) division general manager
D) institutional investor

Answer 82

a

Question 83

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.

Answer 83

b

Question 84

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.

Answer 84

d

Question 85

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.

Answer 85

b

Question 86

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.

Answer 86

c

Question 87

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

Answer 87

a

Question 88

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

Answer 88

b

Question 89

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.

Answer 89

d

Question 90

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.

Answer 90

a