1.1 Why Study Finance?

1 Copyright © 2024 Pearson Education, Inc.Fundamentals of Corporate Finance, 6e (Berk/DeMarzo/Harford) Chapter 1 Corporate Finance and the Financial Manager 1.1 Why Study Finance?1) The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.

Answer: TRUE

Diff: 1 Var: 1

Skill: Conceptual

2) Financial decisions require that you weigh alternatives in strictly monetary terms.

Answer: FALSE

Diff: 1 Var: 1

Skill: Conceptual

3) Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?

• It shows how to assign monetary value to intangibles such as good health and well-being.
• It allows fixed assets and liquid assets to be valued correctly.
• It gives a good indication of the net worth of a person, item, or company and can be used to estimate

any changes in that net worth.

• It shows how to make the costs and benefits of a decision comparable so that we can weigh them

properly.

Answer: D

Diff: 1 Var: 1

Skill: Conceptual

1.2 The Four Types of Firms 1) Partnerships are the most common type of business firm in the world.

Answer: FALSE

Diff: 1 Var: 1

Skill: Conceptual

2) Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.

Answer: TRUE

Diff: 1 Var: 1

Skill: Conceptual

3) Which of the following types of firms does NOT have limited liability?

• sole proprietorships
• limited partnerships
• corporations
• none of the above

Answer: A

Diff: 1 Var: 1

Skill: Conceptual

Fundamentals of Corporate Finance 6e Jonathan Berk, Peter DeMarzo, Jarrad Harford (Test Bank All Chapters, 100% Original Verified, A+ Grade) 1 / 4

2 Copyright © 2024 Pearson Education, Inc.4) Over four-fifths of all U.S. business revenue is generated by which type of firm?

• sole proprietorships
• partnerships
• limited partnerships
• corporations

Answer: D

Diff: 1 Var: 1

Skill: Conceptual

5) What is the most common type of firm in the United States and the world?

• sole proprietorships
• partnerships
• limited partnerships
• corporations

Answer: A

Diff: 1 Var: 1

Skill: Conceptual

6) Which of the following is typically the major factor in limiting the growth of sole proprietorships?

• The organizational structure of such firms tends to become extremely complicated over time.
• It is extremely difficult to transfer control of such firms to a new owner if the present owner dies or

wishes to sell the firm.

• The amount of money that can be raised by such firms is limited by the fact that the single owner must

make good on all debts.

• Investors have a great deal of control over the day-to-day running of such firms, leading to confusion

when conflicts in direction arise.

Answer: C

Diff: 1 Var: 1

Skill: Conceptual

7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm.Which of the following statements regarding their respective relationships to the firm is correct?

• Joe has no management authority within the partnership.
• Jane is legally involved in the managerial decision making of the firm.
• Jane's liability for the firm's debts consists solely of her investment in the firm.
• Withdrawal of Jane from the partnership will dissolve the partnership.

Answer: C

Diff: 1 Var: 1

Skill: Conceptual

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3 Copyright © 2024 Pearson Education, Inc.8) What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?

• The owners of a limited liability company have personal obligation for debts incurred by the

company.

• There is no separation between the company and its owners in a limited liability company.
• The owners of a limited liability company can withdraw from the company without the company

being dissolved.

• The owners of a limited liability company can take an active role in running the company.

Answer: D

Diff: 1 Var: 1

Skill: Conceptual

9) In which of the following ways is a limited liability company like a corporation?

• It was created and developed first in the United States.
• It can choose to be considered a partnership for tax purposes.
• Its owners' liability is restricted to their investment.
• It is directly managed by the owners.

Answer: C

Diff: 1 Var: 1

Skill: Conceptual

10) Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property?

• The number of owners, and hence the spread of risk among these owners, is not limited.
• Its owners are liable for any obligations it enters into.
• The state in which a corporation is incorporated provides safeguards against any wrongdoing by the

corporation.

• It is a legally defined, artificial entity that is separate from its owners.

Answer: D

Diff: 1 Var: 1

Skill: Conceptual

11) Which of the following features of a corporation is LEAST accurate?

• The owners' identities are separate from a corporation.
• The owners of a corporation are not liable for any obligations the corporation enters into.
• Changes in ownership do not result in the dissolution of the corporation.
• Earnings from a corporation are taxed only once.

Answer: D

Diff: 1 Var: 1

Skill: Conceptual

12) What is the major advantage corporations have over other business entities?

• It is easier for a corporation to raise capital than other forms of businesses.
• A corporation is treated as a separate legal entity for tax and legal purposes.
• A corporation's shares can be freely traded among its shareholders.
• All of the above are advantages that a corporation has over other business forms.

Answer: D

Diff: 1 Var: 1

Skill: Conceptual

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4 Copyright © 2024 Pearson Education, Inc.13) Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend payment of $25,000,000 paid proportionally to its shareholders, how much of this amount would Helen receive, disregarding tax?

A) $3,060,000

B) $2,550,000

C) $3,570,000

D) $2,040,000

Answer: B

Explanation: B) Helen will receive ownership dividend payment proportional to her ownership of

10.2%:

Diff: 2 Var: 1

Skill: Analytical

14) Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp.retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments.If the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.?

A) $105,875

B) $127,050

C) $148,225

D) $84,700

Answer: A

Explanation: A) Corporate tax paid on $3.4 earnings = $3.4 × 0.35 = 1.190; earnings after- earnings distributed as taxes paid on dividends by a after-tax dividends per hence a holder of 100,000 shares receives Diff: 2 Var: 1

Skill: Analytical

15) Which of the following is unique for an S corporation?

• The profits and losses of an S corporation are not taxed at the corporate level, but shareholders must

include these profits and losses on their individual tax returns.

• The shareholders of an S corporation must include the firm's profit and losses in their individual

income taxes even if no money is distributed to them.

• There is a maximum limit on the number of shareholders for an S corporation.
• None of the above statements is unique.

Answer: D

Diff: 3 Var: 1

Skill: Conceptual

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