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A Survey of Multiple Choice and True/False Questions Related to Business

1. Two companies are contemplating a merger. In the new entity is expected to require an initial investment of $20 million which will then result in expense savings of $2.7 million for 15 years. The weighted average cost of capital is 8%. The firm just issued bonds at 6.5%. The company would expect the following financial results from the new company:
a. IRR=10.5%, NPV=$5.4 MILLION
b. IRR=10.5%, NPV=$3.1 MILLION
c. IRR=8.0%, NPV=$20.5 MILLION
d. Not enough information to tell

2. Which of the following statements is correct about a company's balance sheet?
a. It displays sources and uses of cash for the period.
b. It is an expansion of the basic accounting equation: Assets = Liabilities + Owners' Equity.
c. It provides a detailed list of revenues and expenses including income tax for a given period.
d. It is unnecessary if both an income statement and statement of cash flows are available.

3. A firm had on its balance sheet the following items: Cash $0.75 million, Accounts Receivable $2.25 million, Inventories $3.00 million, Fixed Assets $4.00 million, Owner's Equity $4.50 million, Accounts Payable $2.00 million, Long-Term Debt $2.00 million and Accrued Liabilities $1.50 million. The company's Working Capital Ratio (Current Ratio) was:
a. .86
b. 1.7
c. 3
d. 1.1

4. Lizpaz Inc. is a levered firm with a debt-to-equity ratio of 0.25. The beta of the common stock is 1.15, while the beta of the debt is 0.3.The market-risk premium is 10 percent and the risk-free rate is 6 percent.The corporate tax rate is 35 percent.
If a new company project has the same risk as the overall firm, what is the weighted average cost of capital for the project?
Choose from the following:
A. 9%
B. 15.2%
C. 15.4%
D. 15.8%

Answer the following true or false:
5. There is unlimited liability in a general partnership.

6. A limited partnership limits the profits partners may receive.

7. Capital Stock refers to high quality beef based broth.

8. The three types of acquisition are: Horizontal Acquisition, Vertical Acquisition and Progressive Acquisition.

9. There are three basic legal procedures that one firm can use to acquire another firm: (1) merger or consolidation, (2) acquisition of stock, and (3) acquisition of assets.

10. You purchased the Microsoft July $85 Call Option in April when the stock was trading at 29.75. On July 24 of the same year the stock shot up to $69.75. Your payoff was $40 per contract.

11. Indus Limousine Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 50 years. The percent yield to maturity is 5 percent and the current price of the bonds is $986.24.

12. If a company has promised to pay interest on debt, it must pay the interest even if it shows no profit for the year.

13. The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is to accept all projects with rates of return greater than or equal to the WACC.

14. The interests of the key managers should be superior to the interests of the shareholders and employees of two merging companies.

15. An heir will receive $175,000 in 50 years from an estate. If the funds are discounted back at a rate of 14 percent, the present value of this gift is $101,376.

16. A company's Net Cash Flow from Operations must be reported quarterly on the Income Statement and is a component of the stock PE ratio.

Solution Preview

Please refer to the attachment file as well for a response which is formatted more neatly.

1. Two companies are contemplating a merger. In the new entity is expected to require an initial investment of $20 million which will then result in expense savings of $2.7 million for 15 years. The weighted average cost of capital is 8%. The firm just issued bonds at 6.5%. The company would expect the following financial results from the new company:
a. IRR=10.5%, NPV=$5.4 MILLION
b. IRR=10.5%, NPV=$3.1 MILLION
c. IRR=8.0%, NPV=$20.5 MILLION
d. Not enough information to tell

Answer: b. IRR=10.5%, NPV=$3.1 MILLION

The discount rate is WACC= 8%

We first calculate the Present value of annuity to be received each year years and then subtract the initial outlay to calculate NPV
n= 15
r= 8.00%
PVIFA (15 periods, 8.% rate ) = 8.559479

Annuity= $2.70 million
Therefore, present value= 23.11 =2.7x8.559479

Initial investment= $20 million
Therefore NPV= $3.11 =23.11-20

IRR
n= 15
Annuity= $3
Initial investment= $20

IRR is that discount rate which will make NPV =0
or PVIFA x $2.7 = $20
Or PVIFA = $20/$2.7= 7.407407407
This PVIFA ( r, 15years ) corresponds to a rate =r of 10.50% (Reading from the tables and interpolating)

n= 15
r= 10.50%
PVIFA (15 periods, 10.5% rate ) = 7.393825

Annuity= 3
Therefore, present value= 19.96 =2.7x7.393825

Initial investment= $20
Therefore NPV= ($0.04) =19.96-20
which is close to zero

2. Which of the following statements is correct about a company's balance sheet?
a. It displays sources and uses of cash for the period.
b. It is an expansion of the basic accounting equation: Assets = ...

Solution Summary

This solution provides responses to each of these business-related multiple choice and true/false questions investigating topics such as IRR, balance sheets, weighted average cost of capital and general partnerships for example. An explanation as to why each response is correct is provided. An Excel attachment file is also provided.

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