LOS q: Discuss the major reasons for divestitures.

Q1. Insofar as reasons for divestitures are concerned, when a firm divests of assets because of a desire to focus on its core business, this is most consistent with the rationale of:

A)   individual parts being worth more than the whole.

B)   a lack of profitability.

C)   assets no longer fitting the long-term strategy.

Q2. Insofar as reasons for divestitures are concerned, when a firm divests of assets because of rising costs or a change in consumer tastes, this is most consistent with the rationale of:

A)   assets no longer fitting the long-term strategy.

B)   a lack of profitability.

C)   individual parts are worth more than the whole.

Q3. Insofar as reasons for divestitures are concerned, when a firm divests of assets because of reverse synergies, this is most consistent with the rationale of:

A)   individual parts being worth more than the whole.

B)   a lack of profitability.

C)   assets no longer fitting the long-term strategy.

LOS q: Discuss the major reasons for divestitures. fficeffice" />

Q1. Insofar as reasons for divestitures are concerned, when a firm divests of assets because of a desire to focus on its core business, this is most consistent with the rationale of:

A)   individual parts being worth more than the whole.

B)   a lack of profitability.

C)   assets no longer fitting the long-term strategy.

Correct answer is C)         

A stated desire to focus on the firm’s core business indicates that the assets being sold are not a part of the core business. Thus, the assets no longer fit the long-term strategy.

Q2. Insofar as reasons for divestitures are concerned, when a firm divests of assets because of rising costs or a change in consumer tastes, this is most consistent with the rationale of:

A)   assets no longer fitting the long-term strategy.

B)   a lack of profitability.

C)   individual parts are worth more than the whole.

Correct answer is B)

Changes in consumer tastes imply that sales are below expectations, while rising costs are self-explanatory. In either case, this seems to indicate that profitability objectives are not being met.

Q3. Insofar as reasons for divestitures are concerned, when a firm divests of assets because of reverse synergies, this is most consistent with the rationale of:

A)   individual parts being worth more than the whole.

B)   a lack of profitability.

C)   assets no longer fitting the long-term strategy.

Correct answer is A)

Whereas synergies imply that the whole is worth more than the sum of the parts, reverse synergies imply that the whole is worth less than the sum of the parts. Therefore, the firm is better off selling the parts to which this applies because they are worth more separately than they are as a part of the firm.

thx

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