KM
AN
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TE
Test Bank for
Corporate Finance, Canadian Edition, 5th edition Berk
Chapter 1-31
ST
Chapter 1 The Corporation
1.1 The Three Types of Firms
1) A sole proprietorship is owned by:
A) one person
N
BA
B) two or more people
C) shareholders
D) bankers
U
Answer: A
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
R
2) In Canada, which of the following organization forms accounts for the greatest number of
N
firms?
A) Limited Liability Partnership
SE
B) Limited Partnership
C) Sole Proprietorship
KM
D) Publicly Traded Corporation
Answer: C
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
D
3) Which of the following organization forms earns the most revenue?
A) Privately Owned Corporation
O
B) Limited Partnership
C) Publicly Owned Corporation
D) Limited Liability Company
Answer: C
C
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
S
4) 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 Type: MC
Topic: 1.1 The Three Types of Firms
1
© 2022 Pearson Canada Inc.
,@
TE
5) 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 his investment.
ST
C) A limited partner is not liable until all of the assets of the general partners have been
exhausted.
D) A general partner's liability is limited by the amount of his investment.
Answer: B
Diff: 2 Type: MC
Topic: 1.1 The Three Types of Firms
6) Which of the following is/are an advantage(s) of incorporation?
N
BA
A) Access to capital markets
B) Limited liability
C) Unlimited life
U
D) All of the above
Answer: D
Diff: 2 Type: MC
R
Topic: 1.1 The Three Types of Firms
N
7) In Canada, a limited liability partnership, LLP, is essentially:
A) a limited partnership without limited partners
SE
B) a limited partnership without a general partner
C) just another name for a limited partnership
KM
D) just another name for a corporation
Answer: B
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
D
8) In Canada, which of the following business organization forms cannot avoid double taxation?
A) Limited Partnership
O
B) Publicly Traded Corporation
C) Privately Owned Corporation
D) Limited Liability Company
Answer: B
C
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
S
9) In Canada, the dividend tax credit gives some relief by:
A) effectively giving a lower tax rate on dividend income than on other sources of income
B) effectively giving a higher tax rate on dividend income than on other sources of income
C) effectively giving the same tax rate on dividend income as on other sources of income
D) effectively giving a tax rate of zero on dividend income compared to other sources of income
Answer: A
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
2
© 2022 Pearson Canada Inc.
,@
TE
10) 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.
ST
C) Unlike a partnership, a disadvantage of a corporation is that it has limited liability.
D) Corporations face more regulations when compared to partnerships.
Answer: D
Diff: 2 Type: MC
Topic: 1.1 The Three Types of Firms
11) In Canada, the distinguishing feature of a corporation is that:
A) there is no legal difference between the corporation and its owners
N
BA
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
U
Answer: B
Diff: 2 Type: MC
Topic: 1.1 The Three Types of Firms
R
12) Which of the following is/are subject to double taxation in Canada?
N
A) Corporation
B) Partnership
SE
C) Sole proprietorship
D) Both A and B
KM
Answer: A
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
D
13) Canada Revenue Agency, CRA, allows an exemption from double taxation for certain flow
through entities where all income produced by the business flows to the investors and virtually
no earnings are retained within the business. These entities are called:
O
A) Canadian Federal Crown Corporations
B) Canadian Controlled Corporations
C) Income Trust Corporations
D) Foreign Controlled Corporations
C
Answer: C
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
S
3
© 2022 Pearson Canada Inc.
,@
TE
14) In 2006, the Canadian government effectively neutralized the tax advantages that had existed
for most income trusts, relative to firms set up as corporations. The advantages that existed for
income trusts prior to these changes were that:
ST
A) income trusts avoided double taxation in that the Canada Revenue Agency did not collect
corporate taxes but rather collected only personal taxes from income trust unit holders
B) income trusts effectively afforded unlimited liability to unit holders while corporate
shareholders could face unlimited liability
C) while double taxation existed for both income trusts and corporations, the net tax paid by
income trust unit holders was in most cases less than that paid by corporate shareholders
D) the changes introduced in 2006 eliminated double taxation for corporations, thereby making
the taxation of income trusts and corporations substantially equivalent
N
BA
Answer: A
Explanation: The 2006 changes imposed new taxes on most income trusts to mirror the total tax
revenue received from corporations. As a result with no material tax advantage, these firms
U
reverted from income trusts back to a corporate structure. The exception was Real Estate
Investment Trusts (REIT) which are exempted from the changes imposed on all other trusts.
Diff: 2 Type: MC
R
Topic: 1.1 The Three Types of Firms
N
15) One of the major characteristics of a limited liability partnership, LLP, in Canada is:
A) the limitation on a partner's liability is only in cases related to actions of negligence by other
SE
partners or those supervised by other partners
B) any partner will not be liable for his or her negligence at any time
KM
C) any partners will be only liable for other partners' negligence
D) none of the above
Answer: A
Diff: 2 Type: MC
D
Topic: 1.1 The Three Types of Firms
16) You own 100 shares of a publicly traded Canadian Corporation. The corporation earns $5.00
O
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?
C
A) $210
B) $300
C) $350
S
D) $500
Answer: A
Explanation: EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate)
$5.00 per share × 100 shares × (1 - .40) × (1 - .30) = $210
Diff: 3 Type: MC
Topic: 1.1 The Three Types of Firms
4
© 2022 Pearson Canada Inc.
,@
TE 17) You own 100 shares of a Canadian Income Trust 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
ST
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: EPS × number of shares × (1 - Individual Tax Rate)
N
BA
$5.00 per share × 100 shares × (1 - .30) = $350
Diff: 3 Type: MC
Topic: 1.1 The Three Types of Firms
U
18) You are a shareholder in a publicly owned 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
R
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
N
your share of the corporation's earnings is closest to:
A) 15%
SE
B) 35%
C) 45%
KM
D) 50%
Answer: C
Explanation: 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
D
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
O
is closest to 45%.
Diff: 3 Type: MC
Topic: 1.1 The Three Types of Firms
C
19) Explain the benefits of incorporation.
Answer: 1. Limited liability
2. Unlimited life
S
3. Access to capital markets / availability of outside funding
4. Required transparency in financial information disclosure
Diff: 2 Type: ES
Topic: 1.1 The Three Types of Firms
5
© 2022 Pearson Canada Inc.
AN
,@
TE
Test Bank for
Corporate Finance, Canadian Edition, 5th edition Berk
Chapter 1-31
ST
Chapter 1 The Corporation
1.1 The Three Types of Firms
1) A sole proprietorship is owned by:
A) one person
N
BA
B) two or more people
C) shareholders
D) bankers
U
Answer: A
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
R
2) In Canada, which of the following organization forms accounts for the greatest number of
N
firms?
A) Limited Liability Partnership
SE
B) Limited Partnership
C) Sole Proprietorship
KM
D) Publicly Traded Corporation
Answer: C
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
D
3) Which of the following organization forms earns the most revenue?
A) Privately Owned Corporation
O
B) Limited Partnership
C) Publicly Owned Corporation
D) Limited Liability Company
Answer: C
C
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
S
4) 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 Type: MC
Topic: 1.1 The Three Types of Firms
1
© 2022 Pearson Canada Inc.
,@
TE
5) 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 his investment.
ST
C) A limited partner is not liable until all of the assets of the general partners have been
exhausted.
D) A general partner's liability is limited by the amount of his investment.
Answer: B
Diff: 2 Type: MC
Topic: 1.1 The Three Types of Firms
6) Which of the following is/are an advantage(s) of incorporation?
N
BA
A) Access to capital markets
B) Limited liability
C) Unlimited life
U
D) All of the above
Answer: D
Diff: 2 Type: MC
R
Topic: 1.1 The Three Types of Firms
N
7) In Canada, a limited liability partnership, LLP, is essentially:
A) a limited partnership without limited partners
SE
B) a limited partnership without a general partner
C) just another name for a limited partnership
KM
D) just another name for a corporation
Answer: B
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
D
8) In Canada, which of the following business organization forms cannot avoid double taxation?
A) Limited Partnership
O
B) Publicly Traded Corporation
C) Privately Owned Corporation
D) Limited Liability Company
Answer: B
C
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
S
9) In Canada, the dividend tax credit gives some relief by:
A) effectively giving a lower tax rate on dividend income than on other sources of income
B) effectively giving a higher tax rate on dividend income than on other sources of income
C) effectively giving the same tax rate on dividend income as on other sources of income
D) effectively giving a tax rate of zero on dividend income compared to other sources of income
Answer: A
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
2
© 2022 Pearson Canada Inc.
,@
TE
10) 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.
ST
C) Unlike a partnership, a disadvantage of a corporation is that it has limited liability.
D) Corporations face more regulations when compared to partnerships.
Answer: D
Diff: 2 Type: MC
Topic: 1.1 The Three Types of Firms
11) In Canada, the distinguishing feature of a corporation is that:
A) there is no legal difference between the corporation and its owners
N
BA
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
U
Answer: B
Diff: 2 Type: MC
Topic: 1.1 The Three Types of Firms
R
12) Which of the following is/are subject to double taxation in Canada?
N
A) Corporation
B) Partnership
SE
C) Sole proprietorship
D) Both A and B
KM
Answer: A
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
D
13) Canada Revenue Agency, CRA, allows an exemption from double taxation for certain flow
through entities where all income produced by the business flows to the investors and virtually
no earnings are retained within the business. These entities are called:
O
A) Canadian Federal Crown Corporations
B) Canadian Controlled Corporations
C) Income Trust Corporations
D) Foreign Controlled Corporations
C
Answer: C
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
S
3
© 2022 Pearson Canada Inc.
,@
TE
14) In 2006, the Canadian government effectively neutralized the tax advantages that had existed
for most income trusts, relative to firms set up as corporations. The advantages that existed for
income trusts prior to these changes were that:
ST
A) income trusts avoided double taxation in that the Canada Revenue Agency did not collect
corporate taxes but rather collected only personal taxes from income trust unit holders
B) income trusts effectively afforded unlimited liability to unit holders while corporate
shareholders could face unlimited liability
C) while double taxation existed for both income trusts and corporations, the net tax paid by
income trust unit holders was in most cases less than that paid by corporate shareholders
D) the changes introduced in 2006 eliminated double taxation for corporations, thereby making
the taxation of income trusts and corporations substantially equivalent
N
BA
Answer: A
Explanation: The 2006 changes imposed new taxes on most income trusts to mirror the total tax
revenue received from corporations. As a result with no material tax advantage, these firms
U
reverted from income trusts back to a corporate structure. The exception was Real Estate
Investment Trusts (REIT) which are exempted from the changes imposed on all other trusts.
Diff: 2 Type: MC
R
Topic: 1.1 The Three Types of Firms
N
15) One of the major characteristics of a limited liability partnership, LLP, in Canada is:
A) the limitation on a partner's liability is only in cases related to actions of negligence by other
SE
partners or those supervised by other partners
B) any partner will not be liable for his or her negligence at any time
KM
C) any partners will be only liable for other partners' negligence
D) none of the above
Answer: A
Diff: 2 Type: MC
D
Topic: 1.1 The Three Types of Firms
16) You own 100 shares of a publicly traded Canadian Corporation. The corporation earns $5.00
O
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?
C
A) $210
B) $300
C) $350
S
D) $500
Answer: A
Explanation: EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate)
$5.00 per share × 100 shares × (1 - .40) × (1 - .30) = $210
Diff: 3 Type: MC
Topic: 1.1 The Three Types of Firms
4
© 2022 Pearson Canada Inc.
,@
TE 17) You own 100 shares of a Canadian Income Trust 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
ST
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: EPS × number of shares × (1 - Individual Tax Rate)
N
BA
$5.00 per share × 100 shares × (1 - .30) = $350
Diff: 3 Type: MC
Topic: 1.1 The Three Types of Firms
U
18) You are a shareholder in a publicly owned 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
R
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
N
your share of the corporation's earnings is closest to:
A) 15%
SE
B) 35%
C) 45%
KM
D) 50%
Answer: C
Explanation: 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
D
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
O
is closest to 45%.
Diff: 3 Type: MC
Topic: 1.1 The Three Types of Firms
C
19) Explain the benefits of incorporation.
Answer: 1. Limited liability
2. Unlimited life
S
3. Access to capital markets / availability of outside funding
4. Required transparency in financial information disclosure
Diff: 2 Type: ES
Topic: 1.1 The Three Types of Firms
5
© 2022 Pearson Canada Inc.
