Corporate Portfolio Strategy Test Questions & Answers Ch.25

Chapter: Chapter 25: Corporate Portfolio Strategy

Multiple Choice

1. Which of the following are valid reasons a given firm might be the best owner of a particular business?

I. Unique links with other businesses (e.g., distribution lines).

II. Distinctive skills such as advertising.

III. Better governance.

IV. Better insight and foresight.

a) I and II only.

b) I, II, and III only.

c) II and IV only.

d) I, II, III, and IV.

Response: []

2. Which of the following would be the LEAST likely way a conglomerate could add value to an acquired company?

a) Innovation.

b) Additional funds.

c) Distribution channels.

d) Managerial experience.

Response: []

3. Which of the following would be the LEAST likely way a private equity firm could add value to an acquired company?

a) Recapitalization.

b) Additional funds.

c) Distribution channels.

d) Managerial experience.

Response: []

4. Which of the following are true concerning diversification and/or diversified firms?

I. Diversified firms have higher levels of debt.

II. There is strong evidence that diversification adds value.

III. Investors can diversify their portfolios at lower cost than companies can.

IV. There is strong evidence that diversified firms have smoother cash flows.

a) I and II only.

b) I, II, and IV only.

c) III only.

d) I, II, III, and IV.

Response: []

5. On a given list, which is most likely the first step in adding value?

a) Identify initiatives for potential new growth.

b) Assess possible improvements in operations.

c) Assess potential divestments and/or acquisitions.

d) Estimate how the company’s value might be increased through changes in its capital structure.

Response: []

True/False

6. The type of owner that qualifies as best for a business may change over the course of the business’s life cycle and will probably vary with its geography.

Response: []

Multiple Choice

7. With respect to emerging markets and developed markets, which of the following is most accurate concerning the role and importance of having influence on critical stakeholders in determining who is the best owner of a business?

a) It can be important in the case of developed markets and is more rarely important in the case of emerging markets.

b) It can be important in the case of emerging markets and is more rarely important in the case of developed markets.

c) It is usually not important, and it is never a reason a given firm might be the best owner of a given business.

d) It is equally important in both developed and emerging markets.

Response: []

True/False

8. With respect to owning and adding value to a consumer packaged-goods business, a firm with great manufacturing skills would probably be a better owner than a firm with distinctive skills in developing and marketing brands.

Response: [A company with great manufacturing skills probably wouldn’t be a better owner of a consumer packaged-goods business, because the latter company’s manufacturing costs aren’t large enough to affect its competitive position. In consumer packaged-goods businesses, distinctive skills in developing and marketing brands are more likely to make one company a better owner than another.]

9. Better governance refers to the way the company’s owners (or their representatives) interact with the management team, and it is often a way private equity firms add value to acquisitions.

Response: []

10. Traditional screening approaches are the best way to apply the best-owner principle.

Response: [Many of the determinants of a best owner are not quantifiable.]

Short Answer

11. Define corporate governance and describe the evidence of the role it can play in value creation from studies of the returns of private equity firms investing in companies.