MGMT 4390: 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 2002 they owned ___ percent of the equity traded in the United States.

32; 62

In the United States, approximately what percent of the firms in the Standard & Poor's 500 have their founding families still involved in day-to-day management?

33%

which component of the M-form structure evaluates the firm's decision making to ensure that it is consistent with the intersts of equity holders?

Board of directors

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

Chief operating officer

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

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

False

A firm pursuing an international strategy that uses a decentralized federation structure delegates strategic and operational decisions to those operational entities that maximize responsiveness to local conditions and international integration.

False

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

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 options in 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 division's performance with a firm's cost of capital and these measures increase the potential for gaming, which is generally minimized by accounting measures.

False

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

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 a diversified firm, market prices are the set by a firm's 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

In an M-form organization, the chief executive officer is solely responsible for strategy implementation.

False

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

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.

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 organization structure for implementing a corporate diversification strategy is the U-form

False

The title chairman of the board often, but not always, identifies the firm's senior executive.

False

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 division in that firm.

False

Which of the following statements regarding family owned firms is accurate?

Family-dominated firms can make strategic decisions faster than large bureaucratic firms.

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 organizational structure is SpandoCorp using?

M-form

In which country are all 20 of the larges 20 firms in the economy family dominated?

Mexico

Which of the following statements regarding outside members of board 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 CEO's 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 a(n) ________ in SpandoCorp.

Senior executive

If Todd Hienz were the chief operating officer for SpandoCorp, his responsibilities would include

Strategy implementation

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.

A firm pursuing an international strategy that uses a centralized hub structure retains strategic and operational decisions at headquarters.

True

A firm pursuing an international strategy that uses a coordinated federation structure organizes each country as a full profit-and-loss center and delegates operational decisions to division general managers or country presidents but reserving broader strategic decisions for corporate headquarters.

True

Another name for 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 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

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

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 project receives funding for the future simply because it received funding in the past.

True

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

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

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 M-form structure is designed to create check 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

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

True

The most popular economically oriented measure of division performance in a diversified firm is economic value added.

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

Traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firm's economic performance.

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

Wells Tucker's position in SpandoCorp is best described as A

a member of the corporate staff.

The divided loyalties that divisional staff managers have between corporate staff managers and functional managers is 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

If the importance of local responsiveness is low, and the importance of global integration is high, a firm should use a ________ approach to managing its international strategy.

centralized hub

In the ______ organizational structure each country operation is organized as a full profit-and-loss center but strategic operational decisions are delegated to division general managers but broader strategic decisions are made at corporate headquarters.

coordinated federation

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

If SpandoCorp wanted to implement an international strategy and was not especially concerned with global integration but wanted to be sure to choose the organizational structure that was the most locally responsive, the company should use a

decentralized federation

In the _____ organizational structure, each company in a country in which a firm operates is organized as a full profit-and-loss division headed by a divisional general manager who is typically the president of the company in that particular country.

decentralized federation

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

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

______ is an economic measures 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, they should use a(n)

economic value added measures of divisional performance

The _____ is a subcommittee of the board of directors that maintain 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

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.

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.

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)

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 the M-form organizations

must cooperate with other divisions to exploit corporate economies of scope.

The two responsibilities of the senior executive in an M-form organization are

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.

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

the interest 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

if SpandoCorp's Board of Directors wanted to ensure that changes in the CEO's compensation would be closely linked to changes in the firm's performance they should

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

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 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 required 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.