Some sample Questions

Multiple/True-False Questions

1) Since buyers in airline industry have high price sensitivity, buyers have low bargaining power against the airlines.

a. Trueb. False

2) Which one of below DECREASES rivalry? a. Standardized products.b. High price sensitivity.c. High switching costs of buyers.d. None of the above.

3) Which of the below INCREASES suppliers’ power?a. When there are many suppliers. b. When the incumbent firms cannot backward integratec. When suppliers cannot forward integrate. d. None of the above.

4) Diversification discount means that companies that are pursuing unrelated diversification can acquire other companies at a discount.

a. True

b. False.

5) From shareholders’ perspective, diversifying the risk faced by the firm is a justifiable reason for

pursuing unrelated diversification strategy.

a. True.

b. False.

6) As a result of managerial hubris, CEOs of the acquiring company may overestimate the value of

the post-acquisition value of the target company.

a. T

b. F

7) If the MV of target is $ 15 mio and “the value of target for the acquirer” is $ 19 mio, what is the maximum amount of premium the acquirer can pay without destroying the value to its shareholders?

a. $ 4 miob. $15 mioc. $19 mio d. $34 mio

8) Procter & Gamble (P&G) has a paper towel and baby diaper business that both use paper products. This is an example of value created through the sharing of activities.

a. T

b. F

9) When firms share activities across units, they are more likely to create value.a. T

b. F

10) Synergy exists when the value created by business units working together exceeds the value that those same units create working independently.

a. T

b. F

11) It is shown that both top executives and owners of the firm wish to diversify the firm to reduce

the risk.

a. T

b. F

12) Diversification may provide two benefits to managers that do not accrue to shareholders:

a. the manager frequently invests in the acquired firm which allows him or her extensive profits;

and the manager can frequently buy excess assets divested by the acquired firm

b. the manager’s supervisory needs are lowered; and the manager is allowed greater time to

oversee a wider range of activities

c. the opportunity for higher compensation through larger firm size, and a reduction in

managerial employment risk

d. None of the above.

13) The ultimate test of the value of a corporate-level strategy is whether the

a. corporation earns a great deal of money.

b. top management team is satisfied with the corporation's performance.

c. businesses in the portfolio are worth more under the management of that particular

company than they would be under any other ownership.

d. businesses in the portfolio increase the firm’s financial returns.

14) Hutchison Whampoa Limited (HWL) has businesses in ports and related services,

telecommunications, property and hotels, retail and manufacturing, and energy and infrastructure.

HWL makes no efforts to share activities or transfer core competencies among the businesses.

HWL is following a strategy of__________diversification.

a. dominant business

b. related constrained

c. related linked

d. unrelated

16. If a resource is valuable and rare, but not costly to imitate, it is a source of competitive parity.

a. T

b. F

17. When the threat of rivalry increases, the average profitability for the incumbent firm in the

industry decreases.

a. True

b. False

18. One criteria for a resource or capability to be a source of competitive advantage is that it allows

the firm to perform a value-creating activity that competitors cannot perform.

a. True

b. False

19. A firm’s activities are always determined after reaching a consensus across all the stakeholders.

a. True

b. False

20. The aircraft industry has long been dominated by two large aircraft manufacturers, Boeing and

Airbus. The demand for major aircraft is low, and Boeing and Airbus aggressively compete for

orders from airlines. What effect will these conditions have on the domestic airline industry

(incumbents are Southwest, Delta, etc., ...)? Please only use the information provided above.

a. It will make the airline industry less attractive because of decreased supplier power

b. It will make the airline industry more attractive because of decreased supplier power

c. It will make the airline industry more attractive because of increased supplier power

d. It will make the airline industry more attractive because of a new entrant

21. Which one of below is a tangible resource?

a. Brand reputation

b. Know how

c. Organizational culture

d. Land

22. When the level of economic value generated by Firm “Shining Star” is equal to the level of

economic value generated by its competitors, Firm “Shining Star” has __________.

a. Temporary Competitive Advantage

b. Competitive Parity

c. Competitive Disadvantage

d. Sustainable competitive advantage

23. Entry barriers are higher in each of the below cases except:

a. Incumbents generated economies of scale

b. Incumbents benefit from economies of scope

c. Standardized products

d. There are network effects in the industry

24. On average, the intensity of price competition increases when there is:a. Nonperishable productsb. Low price sensitivityc. High brand loyaltyd. Excess capacity

Essay questions:

1: Game Theory: Airbus and Boeing will develop a new commercial aircraft. For this particular aircraft, Airbus is ahead, and Boeing is considering whether or not to enter the market. If Boeing stays out, it earns a profit of 0. In this case, Airbus would be a monopolist and earn profits of $1 billion. If Boeing enters, then Airbus must decide to accommodate Boeing’s entry peacefully or wage a price war. With peace, each firm makes a profit of $300 million. With a price war, each firm will lose $100 million. What should Boeing do?

2: [5 Forces]

It was a dark and stormy night. Elise was having an amazing dream about financial accounting, which was suddenly interrupted by the ringing telephone. Struggling out of bed, she finally found the phone and answered, “uh…hello?” Her sweet dreams quickly turned into a nightmare. It was John Boilers, her former MBA teammate, calling from the pay phone at the Waffle House. During the MBA program, he had relied on Elise for help in statistics, strategy, finance, accounting, marketing, and operations, as well as for insights on the occasional dating conundrum. “John, are you crazy? It’s 3 AM!,” Elise exclaimed. “I know, I know. But I just had a great business idea, and I knew you would be interested in hearing about it and getting in on the ground floor.” During the MBA program, John and Elise often bounced business ideas off each other. “Well, I am awake now, so you might as well go ahead. What’s your idea?” “Well, I thought I would open up a small waffle shop near the business school. It’s an awesome opportunity. The owner of the Waffle House and I have been talking. It hardly costs any money to open one. Heck, I heard that there are six new waffle restaurants on or close to campus already. I thought I would open up my waffle shop on Northwestern Avenue next to a couple of other fast food restaurants that are there. This will help me attract customers, and they haven’t even thought of offering waffles yet. You haven’t heard all of it though: I just learned that Purdue is going to start serving waffles with various flavors and toppings at basketball games. I could make a killing by focusing on these games. I think I can get a contract since I am such a loyal fan. All I need is $20,000 to start.” If you were Elise (and had the money and could set aside any personal issues with John), would you lend him the money? Why or why not? Please justify your answer in detail.

3 : [Real Options]

You are the VP of Purchasing for a small airline in Wisconsin, and you are attempting to complete negotiations with a French aircraft manufacturer for a new plane. Given your firm’s current financial condition, you do not seek to acquire a new plane for operations today. In fact, such an aircraft is currently worth much less to you than its current price given the condition of the industry. However, for planning purposes you would like to be able to lock in a price and potentially add a new aircraft to your fleet in the next few years if demand improves.

As you begin negotiations with your French counterpart on potential ways of structuring the contract, your boss inquires into the mechanics of what drives options valuation. In your explanations below, please circle the appropriate responses clearly (e.g., “more” or “less”, “increase” or “decrease”, etc.) in the underlined portions of the text. For each of the individual statements, assume that everything else is held constant.

You state, “Currently, the French manufacturer will allow us to purchase the aircraft in three years. If the contract would instead allow purchase of the aircraft in four years, we can expect the manufacturer to require us to pay more / less for the purchase option.”

“The value that we attach to the option depends upon the uncertainty we envision for future demand of airline tickets. If the level of uncertainty for us is higher than for other airlines given our focus on the leisure segment (or for some other reason), then the value of the option will be higher / lower to us than other airlines.”

“The aircraft currently under negotiation is worth $90 million. The plane we are considering is technically more advanced than others in our fleet. If we went forward with the exact same contract for a different plane worth $80 million, the value of the option would increase / decrease.”

4: [Diversification]

Please read and analyze the article below, and answer the following questions on the next sheet of paper. (1) What, if any, source(s) of value is (are) Dell trying to exploit by diversifying into consumer electronics and digital music? (2) Based on your analysis, do you think this diversification move is a good idea? Why or why not?

Dell Targets Consumers With TVs, Digital Music

Broadening its reach into consumer electronics, computer maker Dell Inc. on Thursday said it planned to launch an online music service and start selling digital music players and flat-panel television sets.

In addition to increasing pressure on traditional rivals such as Apple Computer Co. and Gateway Inc., Dell's move would put it in more direct competition with companies such as Sony Corp. and Samsung. It also signals the growing integration of PCs and other home entertainment devices.

"By introducing high-performing consumer electronics products that closely integrate with the computer, we are delivering what is most important to consumers -- content and experience -- at a better value than they're currently getting," Dell Chief Executive Michael Dell said.

Analysts said Dell could expand into other areas of digital entertainment as well, such as still and video cameras, even though the consumer electronics business has notoriously low margins. The Round Rock, Texas-based firm has never been renowned as a product innovator, but it excels at streamlined manufacturing and is known for tapping markets only when it believes they are profitable.

"It clearly shows the importance of digital products in the consumer lifestyle, and that Dell wants to be there," said Michael Gartenberg, director of research at Jupiter Research.

Dell would not discuss pricing or launch dates for any of the new offerings, but said they would be rolled out by the holiday shopping season. Executives also would not say whether the music service would be subscription-based or a pay-as-you-go system, like Apple's iTunes Music Store, which charges 99 cents for each downloaded song.

Sources said Dell planned to build its music store around technology from San Diego-based MusicMatch Corp., a longtime partner whose music-playing software is bundled with Dell computers. MusicMatch is expected to release a new version of its software later this year that adds the ability to buy downloadable songs.

MusicMatch President Peter D. Csathy wouldn't confirm the reports, saying only that his company has a long and healthy relationship with Dell. Executives have said that their store would be deeply integrated into the MusicMatch player, enabling users to do such things as buying the songs played on MusicMatch's online radio stations.

Several big-name brands are expected to launch downloadable music stores in the next six months, so Dell may have to compete with Amazon.com, Microsoft Corp., Roxio Inc.'s Napster, AOL Time Warner Inc.'s America Online and Yahoo Inc. BuyMusic Inc. already has launched and heavily promoted its online store, and Apple is expected to extend its store by the end of the year to people using Windows-based PCs. "Gateway and Apple stand to lose the most, since much of their recent momentum has hinged on similar offerings," Joel Wagonfeld, a technology analyst with Banc of America Securities, wrote in a research note.

Gateway Chief Executive Ted Waitt said he was neither surprised nor worried about Dell's jumping into consumer electronics. Poway, Calif.-based Gateway has pinned its hopes of returning to profitability on a line of consumer products that include flat- panel TVs. "Dell's entry into consumer electronics validates our strategy," he said. "We knew we wouldn't have this space for ourselves forever."

Apple dismissed Dell's move. "There is little original here," the Cupertino, Calif.-based company said in a statement.

Short Essay Questions (Pls explain using 5 sentences or so)

1. Is “diversification of the firm’s risk” a justifiable reason for unrelated diversification from the perspective of the firm’s shareholders?

a. Yes

b. No

Please circle your answer above & then briefly explain the reason.

2) Brad and Ceyda are planning to open a Turkish restaurant, where they will sell a variety of “meze, which are Turkish appetizers. They are trying to gain competitive advantage by increasing the willingness to pay for the meze that they will sell. Ceyda said that in order to increase willingness to pay, they need to increase the price. Brad said that “no Ceyda, you are wrong, in order to increase willingness to pay, we need to charge lower premiums so that the customers are more willing to buy our meze”. At that moment, Ceyda’s grandma appeared and said that “you are both wrong!”

Who is right, Brad, Ceyda, or Grandma? Why? (Please explain using at most 5 sentences)