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:

Usury Laws

Regulations that impose a maximum interest rate that may be charged on loans.

Low-Income Borrowers

Individuals or households with low income levels who may face difficulties in obtaining loans or are considered high risk by lenders.

Legal Interest Rate

The maximum rate of interest that lenders can legally charge borrowers, often set by law or regulation.

Economic Profits

Profits that exceed the opportunity costs of all resources used by a firm, including both explicit and implicit costs.