Business Entities exam practice questions

Question: A car dealership that sells more than one particular type of automobile displaying the company logo is which of the following?

A partnership.
An LLC.
A distributorship.
An independent contractor.

Answer: A distributorship.

Question: If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

a. True
b. False

Answer:

Question: Which of the following statements is CORRECT?
a. All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
b. An indenture is a bond that is less risky than a mortgage bond.
c. The expected return on a corporate bond will generally exceed the bond’s yield to maturity.
d. If a bond’s coupon rate exceeds its yield to maturity, then its expected return to investors will also exceed its yield to maturity.
e. Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.

Answer Options:
a. True
b. False
c. False
d. False
e. False

Answer: a. True

Question: Bill Mansion borrows funds to purchase a house. He and the bank execute a mortgage securing the loan. Which of the following is true?

Answer Options:
Because a mortgage is considered to be an interest in land, it must be in writing.
Because a mortgage involves a loan, it is not required to be in writing.
Because a mortgage is a debt, it must be in writing.
Unless Bill’s spouse is also obligated to repay the loan, the mortgage is not required to be in writing.

Answer: Because a mortgage is considered to be an interest in land, it must be in writing.

Question: Which of the following is true with respect to trade secrets?

There is only one type of trade secret.
There is not a Uniform Code that deals with trade secrets.
There is only common law protection of trade secrets.
There are multiple types of trade secrets.

Answer: There are multiple types of trade secrets.

Question: A cell engulfing a relatively large particle will likely utilize _______.

Answer Options:
a) phagocytosis
b) pinocytosis
c) receptor-mediated endocytosis
d) exocytosis

Answer: a) phagocytosis

Question: Arbitration is

Answer Options:
a criminal punishment.
a way to allow parties to resolve disputes without having to go to trial.
an award of damages to the victim of a tort.
a U.S. Supreme Court decision.

Answer: a way to allow parties to resolve disputes without having to go to trial.

Question: If the price of money (e.g., interest rates and equity capital costs) increases due to an increase in anticipated inflation, the risk-free rate will also increase. If there is no change in investors’ risk aversion, then the market risk premium (rM – rF) will remain constant. Also, if there is no change in stocks’ betas, then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.
a. True
b. False

Answer: True

Question: Which of the following statements is CORRECT?

Answer Options:
a. One defect of the IRR method is that it does not take account of cash flows over a project’s full life.
b. One defect of the IRR method is that it does not take account of the time value of money.
c. One defect of the IRR method is that it does not take account of the cost of capital.
d. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.
e. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

Answer: e. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

Question: Two of your friends are engaged in a discussion regarding fixtures. The topic is whether a built-in specialty restaurant quality oven in a residence would be treated as a fixture, and, thus, cannot be removed from the property to be installed in a restaurant the seller intends to open. Your response is…

Answer Options:
A. Regardless of where the oven is installed, since it is personal property, it can be moved.
B. Because the oven is installed in the residence which is not a business, it is a fixture that cannot be moved.
C. A fixture is a fixture so whether it had been installed in an existing restaurant or a residence, it is a fixture that cannot be removed.
D. If the seller’s intent is to move the oven to a restaurant, it would be a trade fixture that could be removed from the residence.

Correct Answer
D. If the seller’s intent is to move the oven to a restaurant, it would be a trade fixture that could be removed from the residence.

Question

Answer:

Question: A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?
a. If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.
b. The bond is selling below its par value.
c. The bond is selling at a discount.
d. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.
e. The bond’s current yield is greater than 9%.

Answer Options:
a. False
b. False
c. False
d. True
e. False

Answer: d. True

Question: A resident of another state is contemplating entering into a contract in Florida regarding the acquisition of a business located in Florida. Which of the following would be relevant to a lawsuit involving that contract?

Answer Options:
Federal common law since all cases involving diversity of citizenship must be litigated in federal court.
Florida common law as possibly modified by Florida statutes since all states do not necessarily apply the same common law rules, and even those laws are modified by statute.
Strictly Florida statutory law since Florida’s common law is limited to torts.
General common law because all states follow the same common law.

Answer: Florida common law as possibly modified by Florida statutes since all states do not necessarily apply the same common law rules, and even those laws are modified by statute.

Question: The distinctive Coca Cola bottle design is an example of which of the following?

Answer Options:
A utility patent.
A design patent.
A trade secret.
A plant patent.

Answer: A design patent.

Question: Which of the following is not required to be on a deed?

Answer Options:
A description of the property.
The grantor’s signature.
The grantee’s signature.
All three are required to be on the deed.

Answer: The grantee’s signature.

Question: Which of the following statements is CORRECT?

Answer Options:
a. One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project’s full life whereas MIRR does not.
b. One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.
c. One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.
d. Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order.
e. Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order.

Answer: b

Question: At a 341 meeting, which of the following occurs?

It is a credit counseling meeting.
The trustee assigned to the case and the debtor’s creditors review the bankruptcy petition and have the opportunity to ask the debtor questions regarding his or her assets and liabilities.
It is where the means test is conducted.
The bankruptcy judge decides whether to discharge the debtor or his or her debts.

Answer: The trustee assigned to the case and the debtor’s creditors review the bankruptcy petition and have the opportunity to ask the debtor questions regarding his or her assets and liabilities.

Question: In order to establish a franchise with a franchisor, which of the following are required?

An individual or business entity who is a partner of the franchisor.
An S corporation.
An individual or business entity who is a shareholder of the franchisor.
An individual or business entity independent of the franchisor enters into a contract with the franchisor.

Answer: An individual or business entity independent of the franchisor enters into a contract with the franchisor.

Question: Assume that the economy is enjoying a strong boom, and as a result interest rates and money costs generally are relatively high. The WACC for two mutually exclusive projects that are being considered is 12%. Project S has an IRR of 20% while Project L’s IRR is 15%. The projects have the same NPV at the 12% current WACC. However, you believe that the economy will soon fall into a mild recession, and money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?

Answer Options:
a. You should reject both projects because they will both have negative NPVs under the new conditions.
b. You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.

Answer: There is not enough information provided to determine the correct answer to this question. The decision to accept or reject the projects would depend on the revised NPV calculations based on the new WACC.

Question: Which of the following is considered the swiss army knife of entities?

Sole proprietorship
C corporation
LLC
S corporation

Answer: LLC

Question: A demonstrative devise is which of the following?

Answer Options:
A devise payable to a beneficiary from any source either in money or in property.
A devise of whatever is left in the estate after paying creditors.
A devise of a specific amount from a specific source.
A devise of specific property other than money.

Answer: A devise of a specific amount from a specific source.

Question: The relevance of minimum contacts is which of the following?

Answer Options:
Whether a federal court has diversity jurisdiction.
Whether a case can be brought in a specialty court.
Whether a defendant has been properly served with a complaint and summons.
Whether a person can sue an out or state defendant in the state in which one plaintiff is a citizen.

Answer: Whether a defendant has been properly served with a complaint and summons.

Question: If a state law violates the state constitution but not the U.S. constitution, which of the following is true?

Answer Options:
It is unenforceable in the particular state.
As long as it does not violate the U.S. constitution, it is enforceable in that state.
Whether it is enforceable depends on whether the state law is common law.
None of the alternatives are correct.

Answer: It is unenforceable in the particular state.