Final answer:
The use of ROI to evaluate a manager's short-term performance is most problematic in diversified firms, where it may lead managers to prioritize immediate gains over long-term strategic investments that can enhance overall firm value.
Step-by-step explanation:
The usage of ROI (Return on Investment) to evaluate the short-term financial performance of business-unit managers may not always align with the long-term value enhancement of the firm. This mismatch is most likely to occur in diversified firms.
Diversified firms often comprise various business units with different goals and strategies. When a manager focuses on short-term ROI, they might prioritize projects that deliver quick profits rather than those contributing to long-term growth and overall firm value. This short-term focus may lead to underinvestment in long-life assets like new plants, or in projects with longer-term payoffs like research and development.
Firms can raise financial capital via early-stage investors, reinvesting profits, borrowing through banks or bonds, and selling stock. These choices reflect different expectations about return on investment, risk, and time frames. The focus on immediate ROI can skew preference towards options that are less beneficial in the long run.