JHGFDS
Corporate Finance, 5e (Berk/DeMarzo)
Chapter 1 T h e Corporation
1.1 The Four Types of Firms
All Chapters Included
1) A sole proprietorship is owned by:
A) one person.
B) two or more persons. All Answers Included
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
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Answer: C
Diff: 1
Section: 1.1 The Four Types of Firms
Skill: Conceptual
Ap
4) Which of the following organization forms accounts for the greatest number of firms?
A) "S" corporation
B) Limited partnership
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C) Sole proprietorship
D) "C" corporation
Answer: C
s
Diff: 1
Section: 1.1 The Four Types of Firms
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Skill: Conceptual
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, JHGFDS
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?
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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 it has limited liability.
D) Corporations face more regulations when compared to partnerships.
Ap
Answer: D
Diff: 2
Section: 1.1 The Four Types of Firms
Skill: Conceptual
lu
9) A limited liability company is essentially:
A) a limited partnership without limited partners.
B) a limited partnership without a general partner.
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C) just another name for a limited partnership with a general partner.
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D) just another name for a corporation.
Answer: B
Diff: 1
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Section: 1.1 The Four Types of Firms
Skill: Conceptual
2
ia
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, JHGFDS
10) The distinguishing feature of a corporation is that:
A) there 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) 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?
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 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
Ap
lu
s st
uv
3
ia
Copyright © 2020 Pearson Education, Inc.
@Testbanksmafia
, JHGFDS
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
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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
Ap
lu
s st
uv
4
ia
Copyright © 2020 Pearson Education, Inc.
@Testbanksmafia
Corporate Finance, 5e (Berk/DeMarzo)
Chapter 1 T h e Corporation
1.1 The Four Types of Firms
All Chapters Included
1) A sole proprietorship is owned by:
A) one person.
B) two or more persons. All Answers Included
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
Ap
4) Which of the following organization forms accounts for the greatest number of firms?
A) "S" corporation
B) Limited partnership
lu
C) Sole proprietorship
D) "C" corporation
Answer: C
s
Diff: 1
Section: 1.1 The Four Types of Firms
st
Skill: Conceptual
uv
1
ia
Copyright © 2020 Pearson Education, Inc.
@Testbanksmafia
, JHGFDS
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 it has limited liability.
D) Corporations face more regulations when compared to partnerships.
Ap
Answer: D
Diff: 2
Section: 1.1 The Four Types of Firms
Skill: Conceptual
lu
9) A limited liability company is essentially:
A) a limited partnership without limited partners.
B) a limited partnership without a general partner.
s
C) just another name for a limited partnership with a general partner.
st
D) just another name for a corporation.
Answer: B
Diff: 1
uv
Section: 1.1 The Four Types of Firms
Skill: Conceptual
2
ia
Copyright © 2020 Pearson Education, Inc.
@Testbanksmafia
, JHGFDS
10) The distinguishing feature of a corporation is that:
A) there 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) 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?
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 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
Ap
lu
s st
uv
3
ia
Copyright © 2020 Pearson Education, Inc.
@Testbanksmafia
, JHGFDS
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
Ap
lu
s st
uv
4
ia
Copyright © 2020 Pearson Education, Inc.
@Testbanksmafia
