Test bank for
Fundamentals of Corporate Finance, 6th edition Berk
Chapter 1 -26
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 Var: 1
Skill: Conceptual
2) Financial decisions require that you weigh alternatives in strictly monetary terms.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
3) Which of the following best describes why the Valuation Principle is a key concept in making financial
decisions?
A) It shows how to assign monetary value to intangibles such as good health and well-being.
B) It allows fixed assets and liquid assets to be valued correctly.
C) 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.
D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them
properly.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
1.2 The Four Types of Firms
1) Partnerships are the most common type of business firm in the world.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
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 Var: 1
Skill: Conceptual
3) Which of the following types of firms does NOT have limited liability?
A) sole proprietorships
B) limited partnerships
C) corporations
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,D) none of the above
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
4) Over four-fifths of all U.S. business revenue is generated by which type of firm?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
5) What is the most common type of firm in the United States and the world?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
6) Which of the following is typically the major factor in limiting the growth of sole proprietorships?
A) The organizational structure of such firms tends to become extremely complicated over time.
B) It is extremely difficult to transfer control of such firms to a new owner if the present owner dies or
wishes to sell the firm.
C) The amount of money that can be raised by such firms is limited by the fact that the single owner must
make good on all debts.
D) Investors have a great deal of control over the day-to-day running of such firms, leading to confusion
when conflicts in direction arise.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm.
Which of the following statements regarding their respective relationships to the firm is correct?
A) Joe has no management authority within the partnership.
B) Jane is legally involved in the managerial decision making of the firm.
C) Jane's liability for the firm's debts consists solely of her investment in the firm.
D) Withdrawal of Jane from the partnership will dissolve the partnership.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
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,8) What is the major way in which the roles and obligations of the owners of a limited liability company
differ from the roles and obligations of limited partners in a limited partnership?
A) The owners of a limited liability company have personal obligation for debts incurred by the company.
B) There is no separation between the company and its owners in a limited liability company.
C) The owners of a limited liability company can withdraw from the company without the company being
dissolved.
D) The owners of a limited liability company can take an active role in running the company.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
9) In which of the following ways is a limited liability company like a corporation?
A) It was created and developed first in the United States.
B) It can choose to be considered a partnership for tax purposes.
C) Its owners' liability is restricted to their investment.
D) It is directly managed by the owners.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
10) Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy
protection against the seizure of its property?
A) The number of owners, and hence the spread of risk among these owners, is not limited.
B) Its owners are liable for any obligations it enters into.
C) The state in which a corporation is incorporated provides safeguards against any wrongdoing by the
corporation.
D) It is a legally defined, artificial entity that is separate from its owners.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
11) Which of the following features of a corporation is LEAST accurate?
A) The owners' identities are separate from a corporation.
B) The owners of a corporation are not liable for any obligations the corporation enters into.
C) Changes in ownership do not result in the dissolution of the corporation.
D) Earnings from a corporation are taxed only once.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
12) What is the major advantage corporations have over other business entities?
A) It is easier for a corporation to raise capital than other forms of businesses.
B) A corporation is treated as a separate legal entity for tax and legal purposes.
C) A corporation's shares can be freely traded among its shareholders.
D) All of the above are advantages that a corporation has over other business forms.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
13) Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend payment of
3
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, $25,000,000 paid proportionally to its shareholders, how much of this amount would Helen receive,
disregarding tax?
A) $3,060,000
B) $2,550,000
C) $3,570,000
D) $2,040,000
Answer: B
Explanation: B) Helen will receive ownership dividend payment proportional to her ownership of 10.2%:
Diff: 2 Var: 1
Skill: Analytical
14) Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp.
retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If
the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the
dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.?
A) $105,875
B) $127,050
C) $148,225
D) $84,700
Answer: A
Explanation: A) Corporate tax paid on $3.4 earnings = $3.4 × 0.35 = 1.190; earnings after-
earnings distributed as taxes paid on
dividends by a after-tax dividends per
hence a holder of 100,000 shares receives
Diff: 2 Var: 1
Skill: Analytical
15) Which of the following is unique for an S corporation?
A) The profits and losses of an S corporation are not taxed at the corporate level, but shareholders must
include these profits and losses on their individual tax returns.
B) The shareholders of an S corporation must include the firm's profit and losses in their individual
income taxes even if no money is distributed to them.
C) There is a maximum limit on the number of shareholders for an S corporation.
D) None of the above statements is unique.
Answer: D
Diff: 3 Var: 1
Skill: Conceptual
16) You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation
announces a profit of $6 per share, of which it retains $1 for reinvestment and distributes the rest as
dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share?
A) $0
B) $2.10
C) $1.75
D) $2.52
Answer: C
Explanation: C) Tax paid by shareholder of S
Diff: 2 Var: 1
4
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Fundamentals of Corporate Finance, 6th edition Berk
Chapter 1 -26
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 Var: 1
Skill: Conceptual
2) Financial decisions require that you weigh alternatives in strictly monetary terms.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
3) Which of the following best describes why the Valuation Principle is a key concept in making financial
decisions?
A) It shows how to assign monetary value to intangibles such as good health and well-being.
B) It allows fixed assets and liquid assets to be valued correctly.
C) 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.
D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them
properly.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
1.2 The Four Types of Firms
1) Partnerships are the most common type of business firm in the world.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
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 Var: 1
Skill: Conceptual
3) Which of the following types of firms does NOT have limited liability?
A) sole proprietorships
B) limited partnerships
C) corporations
1
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,D) none of the above
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
4) Over four-fifths of all U.S. business revenue is generated by which type of firm?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
5) What is the most common type of firm in the United States and the world?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
6) Which of the following is typically the major factor in limiting the growth of sole proprietorships?
A) The organizational structure of such firms tends to become extremely complicated over time.
B) It is extremely difficult to transfer control of such firms to a new owner if the present owner dies or
wishes to sell the firm.
C) The amount of money that can be raised by such firms is limited by the fact that the single owner must
make good on all debts.
D) Investors have a great deal of control over the day-to-day running of such firms, leading to confusion
when conflicts in direction arise.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm.
Which of the following statements regarding their respective relationships to the firm is correct?
A) Joe has no management authority within the partnership.
B) Jane is legally involved in the managerial decision making of the firm.
C) Jane's liability for the firm's debts consists solely of her investment in the firm.
D) Withdrawal of Jane from the partnership will dissolve the partnership.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
2
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,8) What is the major way in which the roles and obligations of the owners of a limited liability company
differ from the roles and obligations of limited partners in a limited partnership?
A) The owners of a limited liability company have personal obligation for debts incurred by the company.
B) There is no separation between the company and its owners in a limited liability company.
C) The owners of a limited liability company can withdraw from the company without the company being
dissolved.
D) The owners of a limited liability company can take an active role in running the company.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
9) In which of the following ways is a limited liability company like a corporation?
A) It was created and developed first in the United States.
B) It can choose to be considered a partnership for tax purposes.
C) Its owners' liability is restricted to their investment.
D) It is directly managed by the owners.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
10) Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy
protection against the seizure of its property?
A) The number of owners, and hence the spread of risk among these owners, is not limited.
B) Its owners are liable for any obligations it enters into.
C) The state in which a corporation is incorporated provides safeguards against any wrongdoing by the
corporation.
D) It is a legally defined, artificial entity that is separate from its owners.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
11) Which of the following features of a corporation is LEAST accurate?
A) The owners' identities are separate from a corporation.
B) The owners of a corporation are not liable for any obligations the corporation enters into.
C) Changes in ownership do not result in the dissolution of the corporation.
D) Earnings from a corporation are taxed only once.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
12) What is the major advantage corporations have over other business entities?
A) It is easier for a corporation to raise capital than other forms of businesses.
B) A corporation is treated as a separate legal entity for tax and legal purposes.
C) A corporation's shares can be freely traded among its shareholders.
D) All of the above are advantages that a corporation has over other business forms.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
13) Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend payment of
3
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, $25,000,000 paid proportionally to its shareholders, how much of this amount would Helen receive,
disregarding tax?
A) $3,060,000
B) $2,550,000
C) $3,570,000
D) $2,040,000
Answer: B
Explanation: B) Helen will receive ownership dividend payment proportional to her ownership of 10.2%:
Diff: 2 Var: 1
Skill: Analytical
14) Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp.
retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If
the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the
dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.?
A) $105,875
B) $127,050
C) $148,225
D) $84,700
Answer: A
Explanation: A) Corporate tax paid on $3.4 earnings = $3.4 × 0.35 = 1.190; earnings after-
earnings distributed as taxes paid on
dividends by a after-tax dividends per
hence a holder of 100,000 shares receives
Diff: 2 Var: 1
Skill: Analytical
15) Which of the following is unique for an S corporation?
A) The profits and losses of an S corporation are not taxed at the corporate level, but shareholders must
include these profits and losses on their individual tax returns.
B) The shareholders of an S corporation must include the firm's profit and losses in their individual
income taxes even if no money is distributed to them.
C) There is a maximum limit on the number of shareholders for an S corporation.
D) None of the above statements is unique.
Answer: D
Diff: 3 Var: 1
Skill: Conceptual
16) You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation
announces a profit of $6 per share, of which it retains $1 for reinvestment and distributes the rest as
dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share?
A) $0
B) $2.10
C) $1.75
D) $2.52
Answer: C
Explanation: C) Tax paid by shareholder of S
Diff: 2 Var: 1
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