MGMT 4940 EXAM 3 REVIEW

The separation between firm ownership and management creates a(n) __ relationship.

Synergistic

Agency

Operational

Hierarchical

Agency

Monitoring and oversight of a company's executive team on behalf of the shareholders is primarily accomplished through which group:

The Securities and Exchange Commission

The board of directors

External auditors

The executive management team

The board of directors

According to the textbook, which of the following is NOT an internal governance mechanism?

Ownership concentration

The board of directors

Executive compensation

The market for corporate control

The market for corporate control

Assume that the Ken Cory Consulting and Construction Company is involved in four different businesses that have almost no linkages between them. What is the best way to describe the level or category of diversification?

Related-constrained

Related-linked

Conglomerate

Dominant-business

Conglomerate

Which group of investors is the book referring to when it says owners, principals, or residual claimants?

Bondholders

Common Shareholders

Preferred Shareholders

Institutional Creditors

Common Shareholders

Per the lecture, the Board of Directors of publicly-traded companies are:

A part of the "internal environment" of the company

Considered "external stakeholders"

Regulated by the firm's competitors

Not involved in governance

A part of the "internal environment" of the company

According to the textbook, corporate governance includes all of the following EXCEPT:

A system of checks and balances

A method for resolving conflicts between two specific customers to the company

Oversight of executive decision-making

Protection of shareholder interests

A method for resolving conflicts between two specific customers to the company

8. According to the basic tenets of Agency Theory, in a free-market system like the United States the fundamental goal of business is to:

Maximize social welfare

Minimize employee turnover

Maximize common shareholder value

Increase market share at all costs

Maximize common shareholder value

Corporate governance primarily revolves around the relationship between which of the following three parties?

Customers, suppliers, and employees

Common shareholders, the board of directors, and executives

Government regulators, media, and shareholders

Unions, management, and the board

Common shareholders, the board of directors, and executives

As discussed in your textbook, all of the following are consequences of the Sarbanes-Oxley Act EXCEPT:

Increased financial disclosure requirements

Enhanced oversight of auditors

an increase in the number of IPOS (initial public offerings) occurred because of the new regulations.

Increased personal accountability for executives

an increase in the number of IPOS (initial public offerings) occurred because of the new regulations.

Usually, large-block shareholders are considered to be those shareholders with at least ___ percent of the firm's stock.

1

5

10

20

5

Which type of diversification strategy is the most likely to include the establishment of internal capital markets?

Related-constrained

Single-business

Dominant-business

Related-linked

Related-constrained

Generally, a board member who is directly involved in a firm's day-to-day activities is classified as a(n) ___ director.

Outside

Independent

Inside

Lead

Inside

Corporate-level strategy is primarily concerned with:

How to compete in a specific industry

What different businesses the firm should be in

How to improve daily operational efficiency

Marketing and sales tactics

What different businesses the firm should be in

Assume the Dean Wiley Chocolate Chip Cookie Company acquired the Ken Cory Cake Company. As a result, the company can be described as:

Moving toward a single-business strategy

Moving away from its traditional dominant strategy toward a related linked strategy

Adopting an unrelated diversification strategy

Engaging in horizontal integration exclusively

Moving away from its traditional dominant strategy toward a related linked strategy

Usually, a company is classified as a single-business firm when revenues generated from its core business area are greater than ___ percent.

50

75

90

95

95

The lowest level (least amount) of diversification is the ___ level.

Related-linked

Single-business

Conglomerate

Dominant-business

Single-business

The term "conglomerate" refers to firms using the ___ type of diversification strategy.

Related-constrained

Related-linked

Unrelated

Vertically integrated

Unrelated

Firms that have selected a related-constrained type of diversification strategy generally seek to exploit:

Economies of scope between business units

Financial economies only

Reduced tax liabilities

Market dominance through monopoly

Economies of scope between business units

When Andy's bought the peanut farms, it engaged in what type of integration?

a) Forward integration

b) Horizontal integration

c) Backward integration

d) Conglomerate integration

Backward integration

Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment for furniture manufacturing. This excess capacity will be useful in:

Unrelated diversification projects

Related diversification projects

Divestiture strategies

Liquidation plans

Related diversification projects

Per the discussion in the textbook, the 'good' kind of market power can be accomplished using which of the following?

Vertical integration

Blocking competitors' access to markets

Economies of scope

All of the above could potentially generate the 'good' kind of market power

All of the above could potentially generate the 'good' kind of market power

One of the major risks for firms that follow the unrelated diversification strategy is that:

Competitors can more easily imitate financial economies than they can replicate the value gained from the economies of scope

It is too easy to manage diverse business units

It requires too much focus on one industry

It limits the firm's growth potential

Competitors can more easily imitate financial economies than they can replicate the value gained from the economies of scope

Because of the tax laws of the 1960s and 1970s, common shareholders tended to prefer that corporations:

Pay out all profits as dividends

Keep free cash flows for investment in acquisitions in unrelated businesses

Focus solely on debt reduction

Increase executive salaries

Keep free cash flows for investment in acquisitions in unrelated businesses

A potential conflict of interest between top executives and owners is that top executives might diversify to ___, whereas owners hope to ___.

Maximize profits; minimize risk

Reduce their employment risk; increase the pressure on executives to make the company a success

Gain prestige; reduce executive salaries

Increase firm size; avoid all risk

Reduce their employment risk; increase the pressure on executives to make the company a success

Which defense against a hostile takeover involves the repurchase of the target firm's shares at a premium in exchange for an agreement that the acquirer will no longer target the company?

Poison pill

Golden parachute

Greenmail

Staggered board

Greenmail

"Institutional" owners are:

Individual retail investors

Mostly financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions

Government entities that own private firms

Board members who own 51% of shares

Mostly financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions

One of the approaches that is used to improve the effectiveness of outside directors is:

Requiring that outside directors own a significant amount of common equity in the company

Reducing their compensation

Limiting their term to one year

Allowing them to manage daily operations

Requiring that outside directors own a significant amount of common equity in the company

Executive compensation is a governance mechanism that typically involves all of the following EXCEPT:

Stock options

Salary reductions for inadequate social justice performance

Annual bonuses

Long-term incentive plans

Salary reductions for inadequate social justice performance

The market for corporate control serves as a means of governance when:

The firm is performing exceptionally well

Internal controls have apparently failed and the company's stock price is undervalued

The CEO decides to retire

Dividends are at an all-time high

Internal controls have apparently failed and the company's stock price is undervalued

A hostile takeover defense wherein "the target firm makes its stock less attractive to a potential acquirer" is called:

Greenmail

A poison pill

A golden parachute

A white knight

A poison pill

A firm that earns less than 70 percent of revenue from any single business and has multiple areas of competencies that overlap is likely engaging in ___ diversification.

Related constrained

Unrelated

Single-business

Dominant-business

Related constrained

Which of the following reasons for diversification is MOST likely to increase the firm's true economic value?

Reducing costs through business restructuring

Increasing firm size to improve CEO ego

Diversifying to reduce managerial risk

Using cash to buy unrelated businesses

Reducing costs through business restructuring

Firms seek to create value from economies of scope through all of the following EXCEPT:

Operational relatedness

Corporate relatedness

Strategies to reduce levels of diversification

Sharing of core competencies

Strategies to reduce levels of diversification

According to the textbook, "(Blank) Shareholders" are financial institutions, such as mutual funds and pension plans, that control large-block shareholder positions.

Retail

Institutional

Private

Insider

Institutional

This situation of being better together than the sum of operating independently is also known as:

Efficiency

Synergy

Integration

Restructuring

Synergy

In the PowerPoint lecture, the phrase "Nose In, Hands Out" was used to describe:

The need for micro-management

the idea that outside directors should know their role in the company and not try to overstep their authority to do the executives' jobs

How to handle supplier negotiations

The role of the CEO in board meetings

the idea that outside directors should know their role in the company and not try to overstep their authority to do the executives' jobs

Decisions made by executives to diversify the company based on their personal desire to diversify their own employment risks was categorized as (Blank) diversification:

a) Value-creating

b) Value-reducing

c) Strategic

d) Operational

Value-reducing or Value-reducing diversification

Assuming a company does not have a single business that accounts for 70% or more of the total revenues, the greater the number of areas of "relatedness," the more the level of diversification will be described as "related-___."

Constrained

Linked

Integrated

Diversified

Linked

___ are cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses.

Economies of scale

Economies of scope

Financial economies

Market power

Economies of scope

Which of the following names is NOT used to describe the type of investor who is technically considered the owner of a publicly-traded company?

Principal

Residual claimant

Common shareholder

All of the above are correct

All of the above are correct

A lump-sum payment of cash that is given to one or more top-level managers when a firm is acquired in a takeover bid is called a ___ type of takeover defense strategy.

Poison pill

Golden parachute

Greenmail

Crown jewel

Golden parachute

Backward integration occurs when a company:

Enters an industry where it produces its own inputs (becomes its own supplier)

Buys a retail store to sell its products

Merges with a competitor

Focuses on marketing

Enters an industry where it produces its own inputs (becomes its own supplier)

The New York Stock Exchange and regulations from Sarbanes-Oxley require that the audit committee be:

Comprised entirely of company insiders

Headed by outside directors

Managed by the CEO

Selected by the government

Headed by outside directors

Research suggests that boards of directors perform better if:

They are composed of only insiders

Outside directors own significant equity in the organization

The CEO also serves as the Chairman of the Board

The board meets only once a year

Outside directors own significant equity in the organization

Which of the following acquisitions would be considered the LEAST related?

A car manufacturer acquires a tire company

An upscale "white-tablecloth" restaurant chain acquires a discount travel agency

A software company acquires a hardware manufacturer

A bank acquires a mortgage firm

An upscale "white-tablecloth" restaurant chain acquires a discount travel agency

Research has shown that "horizontal acquisitions":

Are usually able to use activity sharing to successfully create economies of scope

Rarely create value

Only lead to unrelated diversification

Are illegal in the United States

Are usually able to use activity sharing to successfully create economies of scope

A company can use vertical integration to directly gain market power over its competitors from all of the following EXCEPT:

Better control over distribution

Improved access to raw materials

Automatically improved adjustments to technological changes

Reduced dependency on suppliers

Automatically improved adjustments to technological changes

Which of the following types of diversification is MOST likely to create value through financial economies?

Related-constrained

Related-linked

Unrelated

Single-business

Unrelated

Among the value-neutral incentives to diversify, some come from the firm's external environment while others are internal to the firm. External incentives to diversify include:

Low performance and uncertain future cash flows

Changes in antitrust regulations and tax laws

The pursuit of economies of scope to reduce costs

Managerial desires to increase the size of the firm to enhance compensation

Changes in antitrust regulations and tax laws