A Firm Practicing Unrelated Diversification Can Make Better Capital Allocations

question 35

Multiple Choice

A firm practicing unrelated diversification can make better capital allocations to its subsidiary businesses than the external capital market can for all the following reasons EXCEPT:

• A) corporate headquarters can allocate capital according to more specific criteria than is possible with external market allocations.
• B) corporate headquarters has more complete information about the subsidiary businesses than the external capital market.
• C) the firm can acquire other firms with innovative products instead of allocating capital to research and development.
• D) corporate headquarters can more effectively discipline underperforming management teams through resource allocation than can the external market.

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Definitions:

Company Policies

Rules and guidelines developed by organizations to govern employee actions and company operations, ensuring compliance and ethical behavior.

Due Diligence

Reasonable steps taken by a person or firm to satisfy a legal requirement or before entering into an agreement.

Divestiture

Corporate action of selling off subsidiary business units or interests.

Business Transaction

An exchange between two or more parties that involves the buying, selling, or trading of goods, services, or information.