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:

Differential Cost

The difference in cost between two alternative decisions, or the change in costs resulting from an increase or decrease in output.

Differential Revenue

The variation in income resulting from choosing between two different options or time frames.

Differential Effect

The financial impact of a business decision that results in changes to costs or revenue, compared to maintaining the status quo.

Book Value

The net value of a company's assets as recorded on the balance sheet, calculated as total assets minus intangible assets and liabilities.