TEST BANK FOR Corporate Finance, 3rd Edition
by Jonathan Berk and Peter DeMarzo
,Corporate Finance, 3e (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
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%
by Jonathan Berk and Peter DeMarzo
,Corporate Finance, 3e (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
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%
