BUSA Ch 7 Exam 2026 Questions and
Answers
The quickest and easiest way for a firm to diversify its portfolio of businesses is to
make acquisitions. - Correct answer-T
The reasons why a firm would overpay for a company that it acquires include
inadequate due diligence. - Correct answer-T
Ambrose is an account representative for a company that has recently been
purchased by its main industry rival. Ambrose should be pleased because
acquisitions have an 80% chance of success and his job will be more secure. -
Correct answer-F
Due diligence is performed by investment banking firms because of laws
protecting shareholders during acquisitions. - Correct answer-F
It is well-accepted among economists that high levels of debt discipline managers
to act in shareholders' best interests. This explains the current popularity of junk
bonds. - Correct answer-F
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,The effect of leverage on the acquiring firm's financial returns is negative and
should be avoided. - Correct answer-F
Private synergies are widely present in most acquisitions. - Correct answer-F
Transaction costs resulting from an acquisition refer to the direct and indirect costs
resulting from the use of acquisition strategies to create synergies.w - Correct
answer-T
High levels of unrelated diversification will have a positive effect on a firm's long-
term performance if managers focus on financial controls. - Correct answer-F
When a firm becomes highly diversified through acquisitions, managers often
focus on financial controls rather than strategic controls. - Correct answer-T
Top managers typically become overly focused on acquisitions because only they
can perform most of the tasks involved, such as performing due diligence on the
target firm. - Correct answer-F
Acquisitions can become a substitute for innovation in some firms and trigger
future rounds of acquisitions. - Correct answer-T
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
,One of the potential problems associated with acquisitions is that the size of the
firm may exceed the economies of scale generated by the acquisition. - Correct
answer-T
One of the most effective ways to test the feasibility of a future merger or
acquisition is for the firms to first engage in a strategic alliance. - Correct answer-T
Research has shown that maintaining a low or moderate level of firm debt is
critical to the success of an acquisition, even when substantial leverage was used to
finance the acquisition itself. - Correct answer-T
Wilberforce Press is a small book publishing firm in Iowa that has been owned by
the same family since 1895. It is being purchased by Ozarka Publishing, another
family-run business in Nebraska, which has been a specialty publisher for 77 years.
Each company is known for its unique culture passed down from it founders.
Executives and employees in both firms have "grown up" with their companies.
Since both these companies have a long, stable history in highly related industries,
this acquisition has a high probability of success. - Correct answer-F
The majority of acquisitions completed during the acquisition boom of the 1970s
through the 1990s did not enhance the strategic competitiveness of the firms
involved. - Correct answer-T
©COPYRIGHT 2025, ALL RIGHTS RESERVED 3
, Restructuring refers to changes in the composition of a firm's set of businesses or
its financial structure. - Correct answer-T
Green Valley Manufacturing, the major employer in the town of Green Valley, is
laying off 15% of its hourly workers and about 5% of its managerial and staff
employees. This is an indication that Green Valley is experiencing a decline and
that the town council should be preparing for the prospect that the company will
close. - Correct answer-F
Downscoping represents a reduction in the number of a firm's employees and
sometimes in the number of its operating units, but it may or may not represent a
change in the composition of businesses in the corporation's portfolio. - Correct
answer-F
Downscoping makes management of the firm more effective because it allows the
top management team to better understand the remaining businesses. - Correct
answer-T
A leveraged buyout by a third party is often the result of managerial mistakes or
management that has operated in its own self-interest rather than the firm's interest.
- Correct answer-T
©COPYRIGHT 2025, ALL RIGHTS RESERVED 4
Answers
The quickest and easiest way for a firm to diversify its portfolio of businesses is to
make acquisitions. - Correct answer-T
The reasons why a firm would overpay for a company that it acquires include
inadequate due diligence. - Correct answer-T
Ambrose is an account representative for a company that has recently been
purchased by its main industry rival. Ambrose should be pleased because
acquisitions have an 80% chance of success and his job will be more secure. -
Correct answer-F
Due diligence is performed by investment banking firms because of laws
protecting shareholders during acquisitions. - Correct answer-F
It is well-accepted among economists that high levels of debt discipline managers
to act in shareholders' best interests. This explains the current popularity of junk
bonds. - Correct answer-F
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
,The effect of leverage on the acquiring firm's financial returns is negative and
should be avoided. - Correct answer-F
Private synergies are widely present in most acquisitions. - Correct answer-F
Transaction costs resulting from an acquisition refer to the direct and indirect costs
resulting from the use of acquisition strategies to create synergies.w - Correct
answer-T
High levels of unrelated diversification will have a positive effect on a firm's long-
term performance if managers focus on financial controls. - Correct answer-F
When a firm becomes highly diversified through acquisitions, managers often
focus on financial controls rather than strategic controls. - Correct answer-T
Top managers typically become overly focused on acquisitions because only they
can perform most of the tasks involved, such as performing due diligence on the
target firm. - Correct answer-F
Acquisitions can become a substitute for innovation in some firms and trigger
future rounds of acquisitions. - Correct answer-T
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
,One of the potential problems associated with acquisitions is that the size of the
firm may exceed the economies of scale generated by the acquisition. - Correct
answer-T
One of the most effective ways to test the feasibility of a future merger or
acquisition is for the firms to first engage in a strategic alliance. - Correct answer-T
Research has shown that maintaining a low or moderate level of firm debt is
critical to the success of an acquisition, even when substantial leverage was used to
finance the acquisition itself. - Correct answer-T
Wilberforce Press is a small book publishing firm in Iowa that has been owned by
the same family since 1895. It is being purchased by Ozarka Publishing, another
family-run business in Nebraska, which has been a specialty publisher for 77 years.
Each company is known for its unique culture passed down from it founders.
Executives and employees in both firms have "grown up" with their companies.
Since both these companies have a long, stable history in highly related industries,
this acquisition has a high probability of success. - Correct answer-F
The majority of acquisitions completed during the acquisition boom of the 1970s
through the 1990s did not enhance the strategic competitiveness of the firms
involved. - Correct answer-T
©COPYRIGHT 2025, ALL RIGHTS RESERVED 3
, Restructuring refers to changes in the composition of a firm's set of businesses or
its financial structure. - Correct answer-T
Green Valley Manufacturing, the major employer in the town of Green Valley, is
laying off 15% of its hourly workers and about 5% of its managerial and staff
employees. This is an indication that Green Valley is experiencing a decline and
that the town council should be preparing for the prospect that the company will
close. - Correct answer-F
Downscoping represents a reduction in the number of a firm's employees and
sometimes in the number of its operating units, but it may or may not represent a
change in the composition of businesses in the corporation's portfolio. - Correct
answer-F
Downscoping makes management of the firm more effective because it allows the
top management team to better understand the remaining businesses. - Correct
answer-T
A leveraged buyout by a third party is often the result of managerial mistakes or
management that has operated in its own self-interest rather than the firm's interest.
- Correct answer-T
©COPYRIGHT 2025, ALL RIGHTS RESERVED 4
