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:

Contract Multiplier

A factor used in options and futures contracts to determine the total value of the contract.

S&P 500 Contracts

These are futures contracts that track the S&P 500 index, allowing investors to speculate on or hedge against future changes in the index.

Risk-Free Rate

The theoretical return on an investment with no risk of financial loss, often represented by the yield on government bonds.

Portfolio Expected Worth

The projected value of a portfolio, considering the potential returns of the investments within it over a specific timeframe.