Note: For purposes of this question, to clarify the question, we are assuming that what the examiners mean is that each shareholder will receive his/her "portion" of the note receivable plus interest; however, the interpretation does not really make any difference because the question is what amount should be paid to the stockholders (in total). Further, there is nothing about a note that automatically says the interest on the note has to be simple interest. Many notes are short-term (less than a year), and the issue thus never arises. Choice "C" is correct. The annual interest rate on the notes is 10% assumed to be non-compounding (the question does not say that, or indicate it in any way, but it is the only way to get the answer that the examiners have provided). Simple interest each year is $450,000 ($4,500,000 x .10), and 5 years of this interest is $2,250,000. The note principal plus interest is thus $4,500,000 plus $2,250,000, or $6,750,000.Choice "d" is incorrect. $450,000 is only one year's worth of interest, and the time period in this question is five years. This answer also ignores the principal. The stockholders would really be unhappy.
Choice "a" is incorrect. This answer ignores the principal and includes just the interest in the payment to the stockholders. The question says that the shareholders will receive principal PLUS interest.
Choice "b" is incorrect. This answer ignores the interest and just includes the principal in the payment to the stockholders. The question says that the shareholders will receive principal PLUS interest.