chapter 8

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

A board of directors typically consists of

10 to 15 individuals drawn from a firm's 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

In 2005, what percentage of the equity traded in the United States was owned by institutional investors?

59%

Which of the following statements regarding institutional investors is accurate?

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

A business unit within a diversified firm may be sold to the public through a(n)

IPO

Which of the following statements regarding CEO compensation is accurate?

If a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm, changes in compensation are closely linked with changes in firm performance

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

M-form

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 firm's economic performance than on other measures of firm performance and are more likely than insider members to dismiss CEOs following poor performance

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

The business is too related to other firm businesses

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

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 division's accounting earnings for use in the economic value added calculations, R&D spending is usually

added back into the division's 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 the M-form structure evaluates the firm's 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

A(n) ________ occurs when a large, typically diversified firm divests itself of a business in which it has historically been operating and the divested business operates as an independent unit

corporate spin-off

The primary responsibility of the ________ is to provide information about the firm's external and internal environments to the firm's 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

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

finance comittee

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

have a short-term bias

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 firm's capital in managerial perquisites that do not add economic value to a firm and managerial risk aversion

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

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

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.

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

strategy formulation and strategy implementation

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

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

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

In a multidivisional company, one division "sells" its products or services to a second division for a(n) ________, which is set by a firm's corporate management to accomplish corporate objectives

transfer price

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