Question

Amber Corp., a jute manufacturing company, wants to diversify into the food industry. In order to do so, the board of directors decides to move some of its existing resources, expertise, and technology to set the base of the food unit. The market analysts at Amber predict that this unit has a high growth potential. Thus, rather than leaving the new food unit to grow on its own, the board decides to invest in it as it this will help increase the corporate value of the company. In this scenario, Amber Corp. is trying to create value by acting as a(n) _____.

A. adjacent market
B. internal capital market
C. external capital market
D. related-constrained market

Answer 1

Amber Corp. is using its existing resources to invest in a new venture, creating an internal capital market to maximize corporate value. This strategic move suggests that the company is creating value by acting as an internal capital market.

Step-by-step explanation:

In the scenario provided, Amber Corp., a jute manufacturing company, is seeking to diversify by extending its domain into the food industry. In this case, the creation of value occurs as the corporation strategically utilizes its available resources, knowledge, and technology to support and invest in its new venture in the food sector. This strategic approach is distinctive of a value-creation process known as an internal capital market.

Unlike external capital markets, an internal capital market allows for the allocation of financial capital within the various divisions of a conglomerate to maximize overall corporate value. This is particularly advantageous when the market fails to appropriately value or fund the different segments of a diversified company.

By internally redistributing capital and resources, firms like Amber Corp. can ensure that promising business units receive adequate investment to flourish, thereby generating additional value for the corporation as a whole.