Lesson 3.1.3

3.1.3 Demergers Quiz: Pearson Edexcel Economics A, Unit 3

20 questions

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Lesson 3.1.3, Demergers: 20 multiple choice questions for the Pearson Edexcel Economics A (9EC0), Unit 3: Theme 3: Business behaviour and the labour market, written with Revision Ninja.

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The 20 questions

  1. A demerger is best described as:

    • A company splitting into two or more separate independent companies
    • A firm closing all its divisions to raise its profit in one year
    • A firm buying one of its suppliers to secure its inputs
    • Two firms merging to form one larger firm under a single board

  2. Which is a reason a firm might demerge?

    • To increase the number of conglomerate divisions it controls
    • To focus on its core business and unlock value that the market may undervalue in the combined group
    • To reduce its number of shareholders to zero in a single step
    • To avoid all competition by merging again with its former parts

  3. Which is an impact of a demerger on workers?

    • Workers always gain higher pay immediately after the demerger takes place
    • Some employees may move to a new company, with changes to terms, pensions and job security
    • Workers' employment contracts are ended by law as a matter of course
    • Workers are automatically made redundant in every demerger case

  4. How does a demerger differ from a takeover?

    • In a demerger, existing shareholders of the original firm receive shares in the new separate companies
    • A demerger always involves a government buyout of the firm's assets
    • In a takeover, the shareholders of the target firm are paid nothing at all
    • A takeover always splits the company into several new independent firms

  5. Which is an impact of a demerger on consumers?

    • Consumers may see changes in quality or prices, depending on how the new firms compete
    • Demergers are illegal for consumers to take part in under UK law
    • Prices always rise sharply for every product the separated firms sell
    • Consumers lose all choice because only one supplier remains in the market

  6. A conglomerate splits its food and clothing divisions into two independent firms. What is the most likely motive?

    • To reduce the number of product lines to zero across the group
    • To let one firm buy a monopoly in a competing market
    • To increase the group's tax liability by creating more companies
    • To focus each firm on its core market and make each easier to value

  7. After a demerger, the new firms may face which cost change?

    • No change in operating costs in any demerged business
    • Automatic economies of scale from being smaller than before
    • Higher fixed costs from duplicating head-office functions, which can reduce scale economies
    • A fall in administrative costs in every case because of splitting

  8. Which stakeholders are most directly affected by a demerger of a supermarket chain's logistics arm?

    • Only shareholders of unrelated firms in other sectors of the economy
    • No stakeholders, because demergers only affect company paperwork
    • Employees and suppliers in the logistics division, who may face new contracts and terms
    • Only foreign competitors in overseas markets with no UK presence

  9. When is a demerger most likely to improve efficiency?

    • When market share falls to zero in every product line in the group
    • When the firm loses its brand and must rebuild from scratch
    • When managers can focus on a smaller, clearer business with less internal bureaucracy
    • When costs rise by the same amount in every division of the group

  10. What is a risk of demerging a division that previously supplied its parent?

    • The parent is forced to cut its prices automatically for the new firm
    • The new firm may lose a guaranteed customer and need to find new sales or agree new pricing
    • The new firm becomes immune from all competition in its market
    • It keeps a guaranteed set of sales for the rest of its life

  11. A demerged firm lists on the stock market and its shares rise. Which explanation is most consistent?

    • Shares always fall after a demerger takes place in every case
    • The market may value the separated businesses more highly than the combined group
    • Share prices are unrelated to the market's view of the company
    • Demergers prevent any trading in the company's shares afterwards

  12. What is a potential impact of a demerger on workers' pensions?

    • Pensions no longer exist for employees of UK firms at all
    • Pension schemes may need to be split or renegotiated, which can affect benefits
    • Pensions are always abolished by law in every demerger case
    • Pensions increase automatically for all workers after the split

  13. After a demerger, which change in competition is most likely?

    • Competition always falls because firms are smaller after the split
    • Competition may increase as the separated firms now compete independently with each other
    • A monopoly is always created by the separation of the business
    • No competition can exist after any demerger has taken place

  14. A demerger's effect on the market power of the original combined firm is best described as:

    • It may reduce the market power of the original combined firm
    • It removes all barriers to entry in the market for ever
    • It always increases the combined group's market power in the market
    • It turns the market into a monopoly immediately after the split

  15. Evaluate the claim: 'Demergers always benefit shareholders.'

    • True because shareholders own the firm and so cannot lose value
    • True in every case, because shareholders' shares always rise after a split
    • Overstated: shareholders may gain if value is unlocked, but separation costs, lost synergies and debt can reduce value
    • False, because shareholders never receive any shares in the new firms

  16. Which best evaluates the impact of a demerger on workers?

    • Certainly positive for all workers in every demerged business
    • Irrelevant, because workers are not counted as stakeholders in firms
    • Certainly negative for all workers with no exceptions at all
    • The impact depends on the new firms' strategies, but job security, pay and conditions may change, so it may be mixed

  17. A demerger reduces the size of the parent company. Which is the most accurate evaluation of its efficiency effect?

    • It always improves efficiency in every market and industry
    • Efficiency has no link to the size of a firm in any market
    • It may improve managerial focus but can lose synergies, so the net effect on efficiency is uncertain
    • It always reduces efficiency because smaller firms cannot compete

  18. A demerger raises shareholder value but cuts jobs in one region. Which evaluation considers wider stakeholders?

    • Regional economies are always unaffected by changes to firms in them
    • Weigh shareholder gains against local job losses and possible costs to the regional economy and government
    • Job losses are irrelevant to economics as a discipline of study
    • Only shareholder gains matter in any evaluation of the decision

  19. Which is a strong argument against demergers from a consumer perspective?

    • Demergers always stop all innovation in the markets they serve
    • Consumers gain from higher prices in every market as a result
    • Demergers reduce the number of products on sale to zero
    • Loss of economies of scale could raise prices or reduce investment in new products by the separated firms

  20. Why might a demerger create value even though fixed costs rise?

    • Market valuation can rise if focused businesses have clearer strategies and investors value each part separately
    • Costs fall automatically in every case after the separation of the business
    • Fixed costs are irrelevant to the value of a business in any sense
    • Value is created by ignoring what investors think of the firm

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