2024 Pearson Education, Ltd.

1 © 2024 Pearson Education, Ltd.Corporate Finance, 6e, Global Edition (Berk/DeMarzo) Chapter 1 The Corporation 1.1 The Four Types of Firms

1) A sole proprietorship is owned by:

• one person.
• two or more persons.
• shareholders.
• bankers

Answer: A

Diff: 1

Section: 1.1 The Four Types of Firms

Skill: Definition

2) Which of the following organization forms for a business does NOT avoid double taxation?

• Limited partnership
• "C" corporation
• "S" corporation
• Limited liability company

Answer: B

Diff: 1

Section: 1.1 The Four Types of Firms

Skill: Conceptual

3) Which of the following organization forms accounts for the most revenue?

• "S" corporation
• Limited partnership
• "C" corporation

D)Limited liability company

Answer: C

Diff: 1

Section: 1.1 The Four Types of Firms

Skill: Conceptual

4) Which of the following organization forms accounts for the greatest number of firms?

• "S" corporation
• Limited partnership
• Sole proprietorship
• "C" corporation

Answer: C

Diff: 1

Section: 1.1 The Four Types of Firms

Skill: Conceptual

Corporate Finance 6e (Global Edition) By Jonathan Berk, Peter DeMarzo (Test Bank All Chapters, 100% Original Verified, A+ Grade) 1 / 4

2 © 2024 Pearson Education, Ltd.5) Which of the following is NOT an advantage of a sole proprietorship?

• Single taxation
• Ease of setup
• Limited liability
• No separation of ownership and control

Answer: C

Diff: 2

Section: 1.1 The Four Types of Firms

Skill: Conceptual

6) Which of the following statements regarding limited partnerships is TRUE?

• There is no limit on a limited partner's liability.
• A limited partner's liability is limited by the amount of their investment.
• A limited partner is not liable until all the assets of the general partners have been exhausted.
• A general partner's liability is limited by the amount of their investment.

Answer: B

Diff: 2

Section: 1.1 The Four Types of Firms

Skill: Conceptual

7) Which of the following is/are an advantage of incorporation?

• Access to capital markets
• Limited liability
• Unlimited life
• All of the above

Answer: D

Diff: 2

Section: 1.1 The Four Types of Firms

Skill: Conceptual

8) Which of the following statements is most correct?

• An advantage to incorporation is that it allows for less regulation of the business.
• An advantage of a corporation is that it is subject to double taxation.
• Unlike a partnership, a disadvantage of a corporation is that it has limited liability.
• Corporations face more regulations when compared to partnerships.

Answer: D

Diff: 2

Section: 1.1 The Four Types of Firms

Skill: Conceptual

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3 © 2024 Pearson Education, Ltd.

9) A limited liability company is essentially:

• a limited partnership without limited partners.
• a limited partnership without a general partner.
• just another name for a limited partnership with a general partner.
• just another name for a corporation.

Answer: B

Diff: 1

Section: 1.1 The Four Types of Firms

Skill: Conceptual

10) The distinguishing feature of a corporation is that:

• there is no legal difference between the corporation and its owners.
• it is a legally defined, artificial being, separate from its owners.
• it spreads liability for its corporate obligations to all shareholders.
• it provides limited liability only to small shareholders.

Answer: B

Diff: 2

Section: 1.1 The Four Types of Firms

Skill: Conceptual

11) Which of the following are subject to double taxation?

• Corporation
• Partnership
• Sole proprietorship
• Both A and B

Answer: A

Diff: 1

Section: 1.1 The Four Types of Firms

Skill: Conceptual

12) You own 100 shares of a "C" corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 21% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid?

A) $276.50

B) $300.00

C) $350.00

D) $500.00

Answer: A

Explanation: EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate) $5.00 per share × 100 shares × (1 - .21) × (1 - .30) = $276.50

Diff: 2

Section: 1.1 The Four Types of Firms

Skill: Analytical

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4 © 2024 Pearson Education, Ltd.13) You own 100 shares of a Sub Chapter "S" corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 21% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid?

A) $210

B) $300

C) $350

D) $500

Answer: C

Explanation: EPS × number of shares × (1 - Individual Tax Rate)

$5.00 per share × 100 shares × (1 - .30) = $350

Diff: 2

Section: 1.1 The Four Types of Firms

Skill: Analytical

14) You are a shareholder in a "C" corporation. This corporation earns $4 per share before taxes. After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 21% and your tax rate on dividend income is 15%. The effective tax rate on your share of the corporation's earnings is

closest to:

A) 15%.

B) 33%.

C) 45%.

D) 50%.

Answer: B

Explanation: First the corporation pays taxes. It earned $4 per share, but must pay $4 × .21 = $0.84 to the government in corporate taxes. That leaves $4.00 - $0.84 = $3.16 to distribute to the shareholders.However, the shareholder must pay $3.16 × .15 = $0.47 in income taxes on this amount, leaving only $2.69 to the shareholder after all taxes are paid. The total amount paid in taxes is $0.84 + 0.47 = $1.31. The effective tax rate is then $1.31 ÷ $4 = .3275 or 32.75% which is closest to 33%.

Diff: 3

Section: 1.1 The Four Types of Firms

Skill: Analytical

15) Explain the benefits of incorporation.

Answer:

• Limited liability
• Unlimited life
• Access to capital markets/availability of outside funding

Diff: 2

Section: 1.1 The Four Types of Firms

Skill: Conceptual

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