The Better-Off Test for Evaluating Whether a Particular Diversification Move

question 95

Multiple Choice

The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves

• A) assessing whether the diversification move will make the company better off because it will produce a greater number of core competencies.
• B) assessing whether the diversification move will make the company better off by improving its balance sheet strength and credit rating.
• C) assessing whether the diversification move will make the company better off by spreading shareholder risks across a greater number of businesses and industries.
• D) evaluating whether the diversification move will produce a 1 + 1 = 3 outcome such that the company's different businesses perform better together than apart and the whole ends up being greater than the sum of the parts.
• E) assessing whether the diversification move will benefit shareholders due to gains in earnings per share and faster stock price appreciation.

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Definitions:

Interest Rate

The percent of principal charged by the lender for the use of its money.

Prime Rate

The interest rate that commercial banks charge their most creditworthy customers, often used as a benchmark in lending.

Lender

An individual, financial institution, or other entity that provides funds to a borrower under the condition of future repayment with interest.

Bank Credit

The amount of credit available to a company or individual from a banking institution.