Corporate Finance: The Core

Fifth Edition Jonathan Berk Peter DeMarzo Test Bank

Corporate Finance: The Core

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1 Copyright © 2020 Pearson Education, Inc.

Corporate Finance: The Core, 5e (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
• 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

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2 Copyright © 2020 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 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

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

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3 Copyright © 2020 Pearson Education, Inc.

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
• 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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