A New Management Has Been Formed at Griod Tech After

question 25

Multiple Choice

A new management has been formed at Griod Tech after the company overcame a severe financial crisis. Most of the members of the management feel that the company should expand to overcome the losses incurred. It believes that it should enter the foreign market in the form of a wholly owned subsidiary. However, the Director of Griod Tech, Harry, feels otherwise and considers this option to be a risky endeavor. Which of the following justifies Harry's viewpoint?

• A) The company will be unable to maintain a tight control over its foreign operations.
• B) The company will need to split revenues if it wants to use the profits made in one market to develop another market.
• C) The company will not be able to learn directly from the local market where it wishes to enter.
• D) The company will have to bear initial costs and establish distribution entirely by itself.

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Definitions:

Interest Tax Shield

The savings in taxes achieved by deducting interest payments on debt from taxable income.

Financial Risk

The possibility of losing money on an investment or business venture, usually due to changes in market conditions or poor financial management.

Levered Firms

Companies that use debt in addition to equity in their capital structure.

Unlevered Firms

Companies that operate without the use of borrowed money or financial leverage.