Test Bank for - 4e Berk, DeMarzo, Stangeland, Marosi, Harford (...

Test Bank for Fundamentals of Corporate Finance, 4th Canadian Edition, 4e Berk, DeMarzo, Stangeland, Marosi, Harford (All Chapters) 1 / 4

1 Copyright © 2023 Pearson Canada Inc.Fundamentals of Corporate Finance, 4Ce (Berk et al.) 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 Type: TF

Skill: Conceptual

Objective: 1.1 Grasp the importance of financial information in both your personal and business lives

2) 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.

• It allows us to produce accurate financial statements.

Answer: D

Diff: 1 Type: MC

Skill: Conceptual

Objective: 1.1 Grasp the importance of financial information in both your personal and business lives

3) Both personal financial decisions and business financial decisions can best be made by applying the:

• Internal Ranking Criteria.
• Best Alternatives Matrix.
• Valuation Principle.
• Financial Comparison Analysis.
• Law of One Price.

Answer: C

Diff: 1 Type: MC

Skill: Conceptual

Objective: 1.1 Grasp the importance of financial information in both your personal and business lives

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2 Copyright © 2023 Pearson Canada Inc.

1.2 The Three Types of Firms

1) Partnerships are the most common type of business firm in the world.

Answer: FALSE

Diff: 1 Type: TF

Skill: Conceptual

Objective: 1.2 Understand the important features of the three main types of firms and see why the advantages of the corporate form have led it to dominate economic activity

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 Type: TF

Skill: Conceptual

Objective: 1.2 Understand the important features of the three main types of firms and see why the advantages of the corporate form have led it to dominate economic activity

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

• sole proprietorships
• limited partnerships
• private corporations
• public corporations
• limited liability partnerships

Answer: A

Diff: 1 Type: MC

Skill: Conceptual

Objective: 1.2 Understand the important features of the three main types of firms and see why the advantages of the corporate form have led it to dominate economic activity

4) Over 60% of all Canadian business profit is generated by which type of firm?

• sole proprietorships
• partnerships
• limited partnerships
• corporations
• limited liability partnerships

Answer: D

Diff: 1 Type: MC

Skill: Conceptual

Objective: 1.2 Understand the important features of the three main types of firms and see why the advantages of the corporate form have led it to dominate economic activity

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3 Copyright © 2023 Pearson Canada Inc.5) What is the most common type of firm in Canada and the world?

• sole proprietorships
• partnerships
• limited partnerships
• corporations
• limited liability partnerships

Answer: A

Diff: 1 Type: MC

Skill: Conceptual

Objective: 1.2 Understand the important features of the three main types of firms and see why the advantages of the corporate form have led it to dominate economic activity

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

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

wishes to sell the firm.

• The amount of money that can be raised by the firm 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 the firm, leading to confusion

when conflicts in direction arise.

• The owner's personal reputation is the basis for the business.

Answer: C

Diff: 1 Type: MC

Skill: Conceptual

Objective: 1.2 Understand the important features of the three main types of firms and see why the advantages of the corporate form have led it to dominate economic activity

7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in that 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 that partnership.
• Jane's liability consists of all the firm's outstanding debts.

Answer: C

Diff: 1 Type: MC

Skill: Conceptual

Objective: 1.2 Understand the important features of the three main types of firms and see why the advantages of the corporate form have led it to dominate economic activity

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