Skip to content

IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

Which of the following is a commonly cited motive for a company to demerge a division, rather than retain it within the group?

A common motive is strategic focus: each separated business can pursue its own strategy, capital structure and investor base, and the market can value it directly. Demergers do not guarantee price rises, produce cash for the parent, or increase diversification.

  1. ATo allow each business to have a focused strategy and be valued by investors on its own meritsCorrect
  2. BTo increase the group's diversification and reduce risk
  3. CTo avoid any disclosure of the division's results
  4. DTo guarantee a higher share price for both companies
  5. To obtain cash proceeds that the parent keeps

Explanation

Demergers are often used to remove a conglomerate discount, sharpen management focus and let the market value each business separately. Diversification is reduced, not increased; disclosure rises; no share price is guaranteed; and a demerger yields no cash for the parent.

Did you get it right without looking?

One question tells you little. A timed set on Corporate growth, restructuring and divestment shows your real accuracy, how long you take and where you lose marks.

Practise Corporate growth, restructuring and divestmentFree diagnostic mock

More Corporate growth, restructuring and divestment questions