Chapter 10

a board of directors typically consists of

10 to 15 individuals drawn from a firms top management group and from individuals outside the firm

in 1970, institutions owned _________ percent of the equity traded in the united states and by 2005 they owned _______ percent of the equity traded in the united states

32,59

If a division of a multidivisional firm has adjusted accounting earnings of $10 million, a weighted average cost of capital of 10% and a total capital employed by the division of $50 million, the division has an EVA of

5 million

in 2005, what percentage of the equity traded in the united states was owned by institutional investors

59%

A board of directors typically consists of 15 to 30 individuals drawn from a firms top management group and from individuals outside the firm

False

Each division in an M-form organization typically adopts a matrix structure and the division general manager takes on the role of senior project executive

False

Economic measures of divisional performance in a diversified firm compare a divisions performance with a firms cost of capital and these measures increase the potential for gaming, which is generally minimized by accounting measures

False

In an agency relationship the party delegating the decision making authority is called the agent

False

Managerial risk aversion is not as important in diversified firms where risk is distributed

False

Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm.

False

Research on outside members of boards of directors tends to show that outside directors, as compared to insiders, tend to focus less on monitoring a firm's economic performance than on other measures of firm performance

False

The most common organizational structure for implementing a corporate diversification strategy is the U-form

False

if institutional investors are biopic, they should influence firms to invest in relatively less R&D

False

in 1970, institutions owned 62 percent of the equity traded in the united states; by 1990 institutions owned 48 percent of this equity and by 2002, they owned only 32 percent of this equity

False

in principle, only the CEO and the president report to the board of directors while other senior managers report only to the CEO

False

Most accounting measures of divisional performance focus on long-term benefits and minimize the possibility of a short-term bias

Fasle

to the extent that a firm exploits real economies of scope in implementing a diversification strategy, it will be able to unambiguously evaluate the performance of individual divisions in that firm

Fasle

a business unit within a diversified firm may be sold to the public through an

IPO

the most common organizational structure for implementing a corporate diversification strategy is the ________ structure

M-form

which organizational structure is SpandoCorp using

M-form

Another name of the M-form is the multidivisional structure

True

By adjusting for a division's earning and accounting for the cost of investing in a division, economic value added is a much more accurate estimate of a division's economic performance than are traditional accounting measures of performance.

True

Divisions in an M-form organization should be large enough to represent identifiable business entities but small enough so that a division general manager can manage each one effectively.

True

Economic methods of divisional performance in a diversified firm build on accounting methods but adjust those methods to incorporate short-term investments that may generate long-term benefits

True

In the multidivisional structure, each business that the firm engages in is managed through a division

True

Institutional owners are usually pension funds, mutual funds, insurance companies, or other groups of investors that have joined together to manage their investments

True

One common agency problem occurs when managers decide to take some of a firm's capital and invest it in managerial perquisites that do not add economic value to the firm but that do directly benefit those managers.

True

One of the strengths of using a hurdle rate to measure the performance of divisions in a diversified firm is that if the corporation has a single hurdle rate, there is little ambiguity about the performance objectives of divisions.

True

Research has shown that separating the roles of CEO and board chair is positively correlated with firm performance when firms operated in high-growth and very complex environments

True

The divisions in an M-form organization are true profit-and-loss centers

True

The greatest risk associated with treating shared activities as profit centers is that divisions may choose to obtain no services from the shared activities

True

The senior executive in an M-form organization has two responsibilities: strategy formulation and strategy implementation

True

To the extent that a board of directors begins to operate a business on a day-to-day basis, it goes beyond its capabilities

True

Whenever one party to an exchange delegates decision-making authority to a second party, an agency relationship has been created between these parties.

True

in zero-based budgeting, each project has to stand on its own merits each year by being included among the important projects that a firm can afford to fund and no projects receives funding for the future simply because it received funding in the past

True

intermediate products or services are those products or services that are produced in one division of a diversified firm that are used as inputs by another division

True

the M-form structure is designed to create checks and balances for managers that increase the probability that a diversified firm will be managed in ways consistent with the interests of its equity holders

True

wells truckers position in spandocorp is best described as

a member of the corporate staff

the divided loyalties that divisional staff managers have between corporate staff managers and functional managers are potentially the most problematic in ______ staff functions

accounting

when adjusting a divisions accounting earnings for use in the economic value added calculations, R&D spending is usually

added back into the divisions performance

the _______ is the subcommittee of the board of directors that is responsible for ensuring the accuracy of accounting and financial statements

audit committee

which component of M-form structure evaluates the firms decision making to ensure that it is consistent with the interests of equity holders

board of directors

Which role in the office of the president is responsible for strategy implementation?

chief operating officer

an _____ occurs when a large, typically diversified firm divests itself of a business in which it has historically been operating and that the divested business operates as an independent unit

corporate spin-off

the primary responsibility of the ______ is to provide information about the firms external and internal environments to the firms senior executive

corporate staff

Rather than having profit-and-loss responsibilities, ________ are assigned a budget and manage their operations to that budget.

cost centers

in a multidivisional structure, each business that the firm engages in is managed through a

division

______ have full profit-and-loss responsibility and typically have multiple functional managers reporting to them

division general managers

in an M-form organization, the management of day-to-day operations is delegated to

divisional general managers and functional managers who report to division general managers

_____ is an economic measure of divisional performance

economic value added

if spandocorp wanted to measure the performance of its divisions with a method that would minimize any potential short-term bias, it should use an

economic value added measure of divisional performance

All firms that use the multidivisional structure use the same criteria for definding the boundaries of profit-and-loss centers

false

If a well-managed diversified firm uses both accounting and economic measures, it will be able to unambiguously evaluate divisional performance

false

In a diversified firm, market prices are set by a firms corporate management to accomplish corporate objectives while transfer prices are determined by the market forces of supply and demand

false

In an M-form organization the role of the board of directors is to formulate corporate strategies consistent with equity holders interests and to assure strategy implementation

false

an important study on executive compensation found that differences in CEO cash compensation is not very responsive to differences in firm performance even if a substantial percentage of the CEO's compensation came in the form of stock and stock option in the firm

false

its is unusual for a diversified firm to change its transfer-pricing mechanisms every few years in and attempt to find the right transfer-pricing mechanism

false

The ______ is a subcommittee of the board of directors that maintains the relationship between the firm and external capital markets

finance committee

Most accounting measures of divisional performance have a common limitation in that they

have a short-term bias

which of the following statements regarding institutional investors is accurate

high levels of institutional ownership lead firms to sell strategically unrelated businesses

which of the following statements regarding CEO compensation is accurate

if a substantial percentage of CEOs compensation comes in the form of stock and stock options in the firm, changes in compensation are closely linked with changes in firm performance

When the cost of services from a shared activity is ________ the cost of comparable services provided by a division itself or by an outside supplier than the division, general managers have a strong incentive ________.

less than; to use the services of shared activities

Two common agency problems include

managers investing some of a firms capital in managerial perquisites that do not add economic value to a firm and managerial risk aversion

If the bulk materials division of SpandoCorp sold its reams of Spandex to the military division and set the transfer price of these reams equal to the bulk materials actual cost of production, SpandoCorp would be using the ________ transfer pricing scheme. A) exchange autonomy B) mandated full cost C) mandated market based D) dual pricing

mandated full cost

Under which transfer pricing scheme is the transfer price set equal to the selling division's actual cost of production or set equal to the cost of production if the selling division were operating at maximum efficiency?

mandated market based

Kelly Rae's position is SpandoCorp is best described as a(n) A) institutional investor. B) senior executive. C) division general manager. D) member of the board of directors.

member of the board of directors

when compared to the strategy implementation responsibilities of senior executives in U-form organizations, when implementing strategy, division general managers in M-form organizations

must cooperate with other divisions to exploit corporate economies of scope

transfer pricing should equal

opportunity cost

which of the following statements regarding outside members of boards of directors is accurate

outside directors, as compared to insiders, tend to focus more on monitoring a firms economic performance than on other measures of firms performance and are more likely than insider members to dismiss CEOs following poor performance

in an agency relationship, the party that delegates decision-making authority to another individual is known as the

principal

the divisions of an M-form organization are true

profit-and-loss centers

Grace McKenna is best described as an ____ in SpandoCorp

senior executive

the senior executive (the president or CEO) in a M-form organization has two responsibilities

strategy formulation and strategy implementation

If Todd Hienz were the chief operating officer for SpandoCorp, his responsibilities would include A) supervision of the board of directors in its monitoring role. B) strategy implementation. C) strategy formulation. D) strategy control

strategy implementation

in examining the question of whether the roles of CEO and chairman should be combines, empirical research on this question suggests

that combining these roles in positively correlated with firm performance when the firm operates in slow-growth and simple competitive environments

which of the following is not a reason that diversified firms might spin off businesses

the business is too related to other firms businesses

Supervision of the board of directors in its monitoring role is the responsibility of

the chairman of the board

the M-form structure is designed to create checks and balances for managers that increase the probability that a diversified firm will be managed in ways consistent with

the interests of its equity holders

which of the following is a weakness of using a hurdle rate as a standard of evaluating the performance of a division

the use of such a single standard ignores important differences in performance that might exist across divisions

in a multidivisional company, one division sells its products or services to a second division for an _______ which is set by a firms corporate management to accomplish corporate objectives

transfer price

corporate spin-offs are different from asset divestitures

true

in choosing which transfer pricing system to use, a firm should be less concerned about finding the right transfer-pricing mechanism and be more concerned about choosing a transfer-pricing policy that creates the fewest management problems

true

traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firms economic performance

true

transfer prices should equal opportunity cost

true

if spandocorps board of directors wanted to ensure that changes in the ceos compensation would be closely linked to changes in the firms performance it should

use a compensation package that includes a salary and stock options that represent a relatively substantial percentage of the CEO's total compensation package

if spandocorp used a ______ budgeting process, it would assume that no project would receive funding for the future simply because it was funded in the past and would require each project to stand on its own merits each year to be included in a list of important projects that the firm can afford to fund

zero-based

in _____ budgeting, corporate executives create a list of all capital allocation requests from divisions in a firm, rank them from "most important" to "least important" and then fund all the projects a firm can afford, given the amount of capital that is available and no project receives funding simply because it was funded in the past

zero-based

if spandocorp decides to use the method of allocating capital where each project receives funding on its merit and not because it received funding the previous year, it is using

zero-based budgeting