BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Practice Questions and Answers

Correct Answer: B

Choice "b" is correct. A joint venture is like a partnership. A partnership or joint venture can be formed without filing any documents with the state. Choice "a" is incorrect. Formation of a limited partnership requires the filing of a certificate of limited partnership with the state. Choice "c" is incorrect. A limited liability company may be formed only by filing articles of organization with the state. Choice "d" is incorrect. A corporation, including a Subchapter S corporation, may be formed only by filing articles of incorporation with the state.

Correct Answer: B

Choice "b" is correct. In a short form merger (one between a parent and a subsidiary 90% of which is

owned by the parent), the subsidiary's shareholders have a right to dissent and take advantage of the

appraisal remedy.

Choice "a" is incorrect. The subsidiary's board is not required to take any action in a short-form merger.

Choice "c" is incorrect. The parent corporation's shareholders have no right to approve or disapprove a

short-form merger.

Choice "d" is incorrect. The parent corporation's shareholders have no right to dissent to a short-form

merger.

Correct Answer: D

Choice "d" is correct. "No - No - No." Upon the death of a general partner: Rule: A partner's death is an event of dissociation. Where a partner dissociates, the partner's right to participate in the management ceases; the partner's executor does not take the partner's place. Rule: The partner's estate remains liable for the partner's obligations to the partnership and has a right to the deceased partner's share of distributions. Rule: Under the Revised Uniform Partnership Act, a partnership does not automatically dissolve on the death of a partner; rather it will dissolve only if 90 days pass and the remaining partners do not wish to continue the partnership. Choices "a", "b", and "c" are incorrect, per the above rules.

Correct Answer: D

Choice "d" is correct. The business cycle is the rise and fall of economic activity relative to its long-term growth trend. During a contraction or a recession, most industries experience a decline in sales and profits. Similarly, during an expansion, most industries experience an increase in sales and profits. However, health care services are typically not affected by business cycles. People need medical services regardless of whether or not the economy is doing well. Thus, the health care industry is the least affected by the business cycle. Choice "a" is incorrect. During a downturn in economic activity (recession or contraction), firm investment in new plants and equipment typically drops off substantially. Thus, the demand for commercial construction is typically low during a contraction and high during an expansion. Thus, the commercial construction industry is sensitive to the business cycle. Choice "b" is incorrect. During a downturn in economic activity (recession or contraction) firm investment in new plants and equipment typically drops off substantially. Thus, the machinery and equipment industry is sensitive to business cycles. Sales grow during an expansion, but they tend to decline during a contraction or recession. Choice "c" is incorrect. The residential construction industry is sensitive to interest rates, unemployment rates, and consumer wealth. All of these fluctuate with the business cycle. As a result, the residential construction industry is sensitive to the business cycle.

Correct Answer: D

Choice "d" is correct. Younger workers tend to move between jobs more frequently.

Choice "a" is incorrect. This would lead to structural unemployment.

Choice "b" is incorrect. This would lead to cyclical unemployment.

Choice "c" is incorrect. Older workers tend to be voluntarily between jobs less frequently than younger

workers.

Correct Answer: C

Choice "c" is correct. The value at risk method seeks to quantify the exposure of business to a one day

loss in the value of its positions in foreign currencies.

Choices "a", "b", and "d" are incorrect, per above Explanation.

Correct Answer: B

Choice "b" is correct. Hedgehog will not exercise its option and will, instead convert the local currency units collected from the receivables to its domestic currency by selling that currency at the spot rate at the time of collection. The exercise of the option represents a less profitable alternative than sale of the accounts receivable proceeds at the spot rate at the time the receivables are collected. The exercise of the option in comparison to allowing the option to expire is computed as follows:

The premium is a sunk cost and is irrelevant to the Explanation. Note that the premium is a factor in

determining the net gain (loss) but not in deciding whether to exercise option.

Choices "a", "c", and "d" are incorrect, per computation above.

Correct Answer: C

Choice "c" is correct. Because interest expense is a tax deduction, the cost to Brewer is lower than the market yield rate on debt. Choice "a" is incorrect. If market interest rates increase, then Brewer's bonds would have to be offered at a discount to stay competitive with the market. This discount would increase (not lower) Brewer's cost of debt. Choice "b" is incorrect. Issuance of cheaper additional debt will lower future cost of debt, but have no impact on current cost of debt. Choice "d" is incorrect. Presumably, the 8% yield already includes new and old debt.

Correct Answer: B

Choice "b" is correct. The internal rate of return (IRR) is the discount rate that produces a NPV of zero.

Choice "a" is incorrect. IRR valuation does not require cash flows that are constant.

Choice "c" is incorrect. Cost of capital is a percentage, profitability index is a ratio; this won't work.

Choice "d" is incorrect. IRR can be determined even if the profitability index is less than 1.0. A profitability

index of less than 1.0 means a negative NPV, which means the IRR is less than the discount rate being

used.

Correct Answer: C

Choice "c" is correct. First, compute Datacomp's current weighted average cost of capital by using the capital asset pricing model (CAPM):

Because there is no debt, the WACC is equal to the CAPM formula for equity or 15.5%. When debt is introduced, the WACC is calculated by first using the CAPM to determine the required return on equity:

Assuming an after tax cost of debt is equal to 7.5%, the WACC becomes:

(.165 ?(.70)) + (.075 ?(.3)) = 13.8%

Therefore, Datacomp should change its capital structure because its WACC will decrease (Choice "c").

Choices "a", "b", and "d" are incorrect, per above.