The Cost-Of-Entry Test for Evaluating Whether Diversification into a Particular

question 66

Multiple Choice

The cost-of-entry test for evaluating whether diversification into a particular industry is likely to build shareholder value involves determining whether

• A)a newly entered business presents opportunities to cost-efficiently transfer competitively valuable skills or technology from one business to another.
• B)the cost to enter the target industry will strain the company's credit rating.
• C)a company's costs to enter the target industry are so high that the potentials for good profitability and return on investment erode.
• D)the cost to enter the target industry will raise or lower the company's total profits.
• E)the cost a company incurs to enter the target industry will raise or lower production costs.

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Definitions:

Book Value

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

Fair Market Value

The price at which an asset would change hands in a transaction between a willing buyer and seller, both having reasonable knowledge of all relevant facts.

Legal Parent

refers to the entity that owns or controls another entity through shareholding or other means, effectively having a controlling interest in another company.

Consolidated Balance Sheet

A financial statement that aggregates the assets, liabilities, and equity of a parent company and its subsidiaries into a single document, portraying the financial position of the entire group.