TEST BANK
CORPORATE FINANCE
,Corporate Finance, 6e (Berk/Demarzo)
Chapter 1 The Corporation and
Financial Markets
1.1 The Four Types Of Firms
1) A Sole Proprietorship Is Owned By:
A) One Person.
B) Two Of More Persons.
C) Shareholders.
D) 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?
A) Limited Partnership
B) "C" Corporation
C) "S" Corporation
D) 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?
A) "S" Corporation
B) Limited Partnership
C) "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?
A) "S" Corporation
B) Limited Partnership
C) Sole Proprietorship
D) "C"
Corporation
ANSWER: C
,Diff: 1
Section: 1.1 The Four Types Of Firms
Skill: Conceptual
5) Which Of The Following Is NOT An Advantage Of A Sole Proprietorship?
A) Single Taxation
B) Ease Of Setup
C) Limited Liability
D) 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?
A) There Is No Limit On A Limited Partner's Liability.
B) A Limited Partner's Liability Is Limited By The Amount Of Their Investment.
C) A Limited Partner Is Not Liable Until All The Assets Of The General Partners Have Been
Exhausted.
D) 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?
A) Access To Capital Markets
B) Limited Liability
C) Unlimited Life
D) 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?
A) An Advantage To Incorporation Is That It Allows For Less Regulation Of The Business.
B) An Advantage Of A Corporation Is That It Is Subject To Double Taxation.
C) Unlike A Partnership, A Disadvantage Of A Corporation Is That Has Limited Liability.
D) 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) A Limited Partnership Without Limited Partners.
B) A Limited Partnership Without A General Partner.
C) Just Another Name For A Limited Partnership.
D) 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:
A) Their Is No Legal Difference Between The Corporation And Its Owners.
B) It Is A Legally Defined, Artificial Being, Separate From Its Owners.
C) It Spreads Liability For Its Corporate Obligations To All Shareholders.
D) 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?
A) Corporation
B) Partnership
C) Sole Proprietorship
D) 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
,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 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: C
Explanation: C) 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 35% And Your Tax Rate On Dividend Income Is 15%. The Effective
Tax Rate On Your Share Of The Corporations Earnings Is Closest To:
A) 15%
B) 35%
C) 45%
D) 50%
ANSWER: C
Explanation: C) First The Corporation Pays Taxes. It Earned $4 Per Share, But Must Pay $4 × .35 =
$1.40 To The Government In Corporate Taxes. That Leaves $4.00 - $1.40 = $2.60 To Distribute
To The Shareholders. However, The Shareholder Must Pay $2.60 × .15 = $0.39 In Income
Taxes On This Amount, Leaving Only $2.21 To The Shareholder After All Taxes Are Paid. The
Total Amount Paid In Taxes Is $1.40 + 0.39 = $1.79. The Effective Tax Rate Is Then $1.79 ÷ $4
= .4475 Or 44.75% Which Is Closest To 45%.
Diff: 3
Section: 1.1 The Four Types Of Firms
Skill: Analytical
15) Explain The Benefits Of
Incorporation. ANSWER:
1. Limited Liability
2. Unlimited Life
3. Access To Capital Markets/Availability Of Outside
Funding Diff: 2
Section: 1.1 The Four Types Of Firms
Skill: Conceptual
,16) Explain The Difference Between A Sub-Chapter "S" Corporation And A Sub-
Chapter "C" Corporation.
ANSWER:
"C" Corporation "S" Corporation
Publicly Traded Stock Privately Traded Stock
No More Than 75
Unlimited Shareholders Shareholders
Double Taxation Taxed Like A Partnership
Diff: 2
Section: 1.1 The Four Types Of Firms
Skill: Conceptual
1.2 Ownership Versus Control Of Corporations
1) In A Corporation, The Ultimate Decisions Regarding Business Matters Are Made By:
A) The Board Of Directors.
B) Debt Holders.
C) Shareholders.
D) Investors.
ANSWER:
A Diff: 1
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Conceptual
2) The Person Charged With Running The Corporation By Instituting The Rules And Policies
Set By The Board Of Directors Is Called:
A) The Chief Operating Officer.
B) The Company President.
C) The Chief Executive Officer.
D) The Chief Financial
Officer. ANSWER: C
Diff: 1
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Definition
3) The Principal-Agent Problem Arises:
A) Because Managers Have Little Incentive To Work In The Interest Of Shareholders
When This Means Working Against Their Own Self-Interest.
B) Because Of The Separation Of Ownership And Control In A Corporation.
C) Both A And B
D) None Of The
Above ANSWER: C
Diff: 1
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Conceptual
,4) If Shareholders Are Unhappy With A CEO's Performance, They Are Most Likely To:
A) Buy More Shares In An Effort To Gain Control Of The Firm.
B) File A Shareholder Resolution.
C) Replace The CEO Through A Grassroots Shareholder Uprising.
D) Sell Their
Shares.
ANSWER: D
Diff: 2
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Conceptual
5) A Is When A Rich Individual Or Organization Purchases A Large Fraction Of
The Stock Of A Poorly Performing Firm And In Doing So Gets Enough Votes To Replace The
Board Of Directors And The CEO.
A) Shareholder Proposal
B) Leveraged Buyout
C) Shareholder Action
D) Hostile
Takeover
ANSWER: D
Diff: 2
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Definition
6) Which Of The Following Statements Is FALSE?
A) In Bankruptcy, Management Is Given The Opportunity To Reorganize The Firm And
Renegotiate With Debt Holders.
B) Because A Corporation Is A Separate Legal Entity, When It Fails To Repay Its Debts,
The People Who Lent To The Firm, The Debt Holders Are Entitled To Seize The Assets Of
The Corporation In Compensation For The Default.
C) As Long As The Corporation Can Satisfy The Claims Of The Debt Holders, Ownership
Remains In The Hands Of The Equity Holders.
D) If The Corporation Fails To Satisfy Debt Holders' Claims, Debt Holders May Lose
Control Of The Firm.
ANSWER: D
Explanation: D) If The Corporation Fails To Satisfy Debt Holders' Claims, Debt Holders May
Take Control Of The Firm.
Diff: 2
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Conceptual
7) The Most Senior Financial Manager In A Corporation Is Usually Called:
A) The Chief Executive Officer.
B) The Chief Financial Officer.
C) The Chief Operating Officer.
D) The Chairman Of The
Board. ANSWER: B
Diff: 1
Section: 1.2 Ownership Versus Control Of Corporations
, Skill: Definition
CORPORATE FINANCE
,Corporate Finance, 6e (Berk/Demarzo)
Chapter 1 The Corporation and
Financial Markets
1.1 The Four Types Of Firms
1) A Sole Proprietorship Is Owned By:
A) One Person.
B) Two Of More Persons.
C) Shareholders.
D) 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?
A) Limited Partnership
B) "C" Corporation
C) "S" Corporation
D) 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?
A) "S" Corporation
B) Limited Partnership
C) "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?
A) "S" Corporation
B) Limited Partnership
C) Sole Proprietorship
D) "C"
Corporation
ANSWER: C
,Diff: 1
Section: 1.1 The Four Types Of Firms
Skill: Conceptual
5) Which Of The Following Is NOT An Advantage Of A Sole Proprietorship?
A) Single Taxation
B) Ease Of Setup
C) Limited Liability
D) 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?
A) There Is No Limit On A Limited Partner's Liability.
B) A Limited Partner's Liability Is Limited By The Amount Of Their Investment.
C) A Limited Partner Is Not Liable Until All The Assets Of The General Partners Have Been
Exhausted.
D) 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?
A) Access To Capital Markets
B) Limited Liability
C) Unlimited Life
D) 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?
A) An Advantage To Incorporation Is That It Allows For Less Regulation Of The Business.
B) An Advantage Of A Corporation Is That It Is Subject To Double Taxation.
C) Unlike A Partnership, A Disadvantage Of A Corporation Is That Has Limited Liability.
D) 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) A Limited Partnership Without Limited Partners.
B) A Limited Partnership Without A General Partner.
C) Just Another Name For A Limited Partnership.
D) 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:
A) Their Is No Legal Difference Between The Corporation And Its Owners.
B) It Is A Legally Defined, Artificial Being, Separate From Its Owners.
C) It Spreads Liability For Its Corporate Obligations To All Shareholders.
D) 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?
A) Corporation
B) Partnership
C) Sole Proprietorship
D) 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
,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 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: C
Explanation: C) 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 35% And Your Tax Rate On Dividend Income Is 15%. The Effective
Tax Rate On Your Share Of The Corporations Earnings Is Closest To:
A) 15%
B) 35%
C) 45%
D) 50%
ANSWER: C
Explanation: C) First The Corporation Pays Taxes. It Earned $4 Per Share, But Must Pay $4 × .35 =
$1.40 To The Government In Corporate Taxes. That Leaves $4.00 - $1.40 = $2.60 To Distribute
To The Shareholders. However, The Shareholder Must Pay $2.60 × .15 = $0.39 In Income
Taxes On This Amount, Leaving Only $2.21 To The Shareholder After All Taxes Are Paid. The
Total Amount Paid In Taxes Is $1.40 + 0.39 = $1.79. The Effective Tax Rate Is Then $1.79 ÷ $4
= .4475 Or 44.75% Which Is Closest To 45%.
Diff: 3
Section: 1.1 The Four Types Of Firms
Skill: Analytical
15) Explain The Benefits Of
Incorporation. ANSWER:
1. Limited Liability
2. Unlimited Life
3. Access To Capital Markets/Availability Of Outside
Funding Diff: 2
Section: 1.1 The Four Types Of Firms
Skill: Conceptual
,16) Explain The Difference Between A Sub-Chapter "S" Corporation And A Sub-
Chapter "C" Corporation.
ANSWER:
"C" Corporation "S" Corporation
Publicly Traded Stock Privately Traded Stock
No More Than 75
Unlimited Shareholders Shareholders
Double Taxation Taxed Like A Partnership
Diff: 2
Section: 1.1 The Four Types Of Firms
Skill: Conceptual
1.2 Ownership Versus Control Of Corporations
1) In A Corporation, The Ultimate Decisions Regarding Business Matters Are Made By:
A) The Board Of Directors.
B) Debt Holders.
C) Shareholders.
D) Investors.
ANSWER:
A Diff: 1
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Conceptual
2) The Person Charged With Running The Corporation By Instituting The Rules And Policies
Set By The Board Of Directors Is Called:
A) The Chief Operating Officer.
B) The Company President.
C) The Chief Executive Officer.
D) The Chief Financial
Officer. ANSWER: C
Diff: 1
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Definition
3) The Principal-Agent Problem Arises:
A) Because Managers Have Little Incentive To Work In The Interest Of Shareholders
When This Means Working Against Their Own Self-Interest.
B) Because Of The Separation Of Ownership And Control In A Corporation.
C) Both A And B
D) None Of The
Above ANSWER: C
Diff: 1
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Conceptual
,4) If Shareholders Are Unhappy With A CEO's Performance, They Are Most Likely To:
A) Buy More Shares In An Effort To Gain Control Of The Firm.
B) File A Shareholder Resolution.
C) Replace The CEO Through A Grassroots Shareholder Uprising.
D) Sell Their
Shares.
ANSWER: D
Diff: 2
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Conceptual
5) A Is When A Rich Individual Or Organization Purchases A Large Fraction Of
The Stock Of A Poorly Performing Firm And In Doing So Gets Enough Votes To Replace The
Board Of Directors And The CEO.
A) Shareholder Proposal
B) Leveraged Buyout
C) Shareholder Action
D) Hostile
Takeover
ANSWER: D
Diff: 2
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Definition
6) Which Of The Following Statements Is FALSE?
A) In Bankruptcy, Management Is Given The Opportunity To Reorganize The Firm And
Renegotiate With Debt Holders.
B) Because A Corporation Is A Separate Legal Entity, When It Fails To Repay Its Debts,
The People Who Lent To The Firm, The Debt Holders Are Entitled To Seize The Assets Of
The Corporation In Compensation For The Default.
C) As Long As The Corporation Can Satisfy The Claims Of The Debt Holders, Ownership
Remains In The Hands Of The Equity Holders.
D) If The Corporation Fails To Satisfy Debt Holders' Claims, Debt Holders May Lose
Control Of The Firm.
ANSWER: D
Explanation: D) If The Corporation Fails To Satisfy Debt Holders' Claims, Debt Holders May
Take Control Of The Firm.
Diff: 2
Section: 1.2 Ownership Versus Control Of Corporations
Skill: Conceptual
7) The Most Senior Financial Manager In A Corporation Is Usually Called:
A) The Chief Executive Officer.
B) The Chief Financial Officer.
C) The Chief Operating Officer.
D) The Chairman Of The
Board. ANSWER: B
Diff: 1
Section: 1.2 Ownership Versus Control Of Corporations
, Skill: Definition
