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Test Bank
for
Corporate Finance
Fourth Edition
Jonathan Berk
Peter DeMarzo
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1 Copyright © 2017 Pearson Education, Inc.Corporate Finance, 4e (Berk / DeMarzo) Chapter 1 The Corporation
1.1 The Four Types of Firms
1) A sole proprietorship is owned by:
- one person.
- two of 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
- 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 2 / 4
2 Copyright © 2017 Pearson Education, Inc.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 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
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.
- just another name for a corporation.
Answer: B
Diff: 1
Section: 1.1 The Four Types of Firms
Skill: Conceptual 3 / 4
3 Copyright © 2017 Pearson Education, Inc.
10) The distinguishing feature of a corporation is that:
- their 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.
- 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
- 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 40% 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: A
Explanation: A) EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate) $5.00 per share × 100 shares × (1 - .40) × (1 - .30) = $210
Diff: 2
Section: 1.1 The Four Types of Firms
Skill: Analytical
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