When a Firm That Follows the Unrelated Diversification Strategy Allocates

question 27

Multiple Choice

When a firm that follows the unrelated diversification strategy allocates capital from internal sources,it can create value by doing all of the following EXCEPT:

• A) Using more efficient budgeting processes than the external market.
• B) Discovering privately which business units provide the highest return to invested capital.
• C) Disregarding its debt rating and investing large amounts of capital in projected growth areas.
• D) Accessing capital at a lower cost.
• If a firm does not effectively manage its debt rating, the cost of capital could go up as evidenced by GE.

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Definitions:

Demand

How much of a good or service people are inclined and have the means to buy, spanning a range of prices, during a designated timeframe.

Equilibrium Price

The price at which the quantity of a good or service supplied is equal to the quantity demanded, leading to market stability where there is no excess supply or demand.

Equilibrium Quantity

The amount of goods or services available and sought after at the balance price.

Scalping

The practice of buying tickets, securities, or commodities for immediate resale at higher prices, often to exploit short-term fluctuations.