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Corporate Finance, 4e (Berk / DeMarzo)
Chapter 1 The Corporation
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
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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
C) Sole proprietorship
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D) "C" corporation
Answer: C
Diff: 1
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Section: 1.1 The Four Types of Firms
Skill: Conceptual
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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 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.
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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
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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
Ap
lu
s st
uv
3
ia
Copyright © 2017 Pearson Education, Inc.
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, kjhgfdsa
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
Ap
15) Explain the benefits of incorporation.
Answer:
1. Limited liability
2. Unlimited life
lu
3. Access to capital markets/availability of outside funding
Diff: 2
Section: 1.1 The Four Types of Firms
s
Skill: Conceptual
st
uv
4
ia
Copyright © 2017 Pearson Education, Inc.
@Testbanksmafia
Corporate Finance, 4e (Berk / DeMarzo)
Chapter 1 The Corporation
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
Ap
4) Which of the following organization forms accounts for the greatest number of firms?
A) "S" corporation
B) Limited partnership
C) Sole proprietorship
lu
D) "C" corporation
Answer: C
Diff: 1
s
Section: 1.1 The Four Types of Firms
Skill: Conceptual
st
uv
1
ia
Copyright © 2017 Pearson Education, Inc.
@Testbanksmafia
, kjhgfdsa
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.
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.
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 © 2017 Pearson Education, Inc.
@Testbanksmafia
, kjhgfdsa
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
Ap
lu
s st
uv
3
ia
Copyright © 2017 Pearson Education, Inc.
@Testbanksmafia
, kjhgfdsa
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
Ap
15) Explain the benefits of incorporation.
Answer:
1. Limited liability
2. Unlimited life
lu
3. Access to capital markets/availability of outside funding
Diff: 2
Section: 1.1 The Four Types of Firms
s
Skill: Conceptual
st
uv
4
ia
Copyright © 2017 Pearson Education, Inc.
@Testbanksmafia
