FINC 3610 Exam 1 Practice Questions & Answers
(Verified Update)
This comprehensive study guide covers the core domains tested
on FINC 3610 Exam 1: Foundations of Finance & Time Value of
Money at Auburn University. It includes original practice
questions with detailed rationales, organized by the core exam
domains: Forms of Business Organization, Agency Conflicts &
Corporate Governance, Maximizing Shareholder Wealth, and
Time Value of Money (TVM).
Exam Overview & Blueprint:
Parameter Details
Exam
Multiple-choice, true/false, and calculation-based questions
Format
Sole proprietorships, partnerships, corporations, agency problems, corporate governance, shareholder
Core Topics
wealth maximization, future value, present value, annuities, perpetuities, compounding
Key
FV = PV(1+r)^t; PV = FV/(1+r)^t; FV of annuity; PV of annuity; PV of perpetuity
Formulas
2026 Focus NGN-style application problems, TVM calculations with financial calculators, agency cost identification
Section 1: Forms of Business Organization
,1.1 Sole Proprietorships
Q1. A business owned by a single individual, where there is no
legal distinction between the owner and the business, is called
a:
A) Corporation
B) Partnership
C) Sole proprietorship
D) Limited liability company
Answer: C
Rationale: A sole proprietorship is a business owned and
operated by one person. There is no legal distinction between
the owner and the business entity, meaning the owner is
personally liable for all business debts and obligations.
Q2. Which of the following is a primary advantage of a sole
proprietorship?
A) Unlimited liability
B) Easy and inexpensive to start
C) Double taxation
D) Perpetual existence
Answer: B
Rationale: The primary advantages of a sole proprietorship are
that it is easy and inexpensive to start, and the business income
,is taxed as personal income (avoiding double taxation). The
disadvantages include unlimited liability, limited life, and
difficulty transferring ownership.
Q3. Which of the following is a primary disadvantage of a sole
proprietorship?
A) Limited liability for the owner
B) Easy transfer of ownership
C) Unlimited personal liability
D) Double taxation of earnings
Answer: C
Rationale: The most significant disadvantage of a sole
proprietorship is unlimited personal liability. Creditors can go
after the owner's personal assets to satisfy business debts.
Other disadvantages include limited life (the business ends
when the owner dies) and limited capital (equity is limited to
the owner's personal wealth).
Q4. In a sole proprietorship, the business income is:
A) Taxed as corporate income
B) Taxed as personal income of the owner
C) Exempt from taxation
D) Subject to double taxation
Answer: B
Rationale: In a sole proprietorship, the business income is taxed
, as the personal income of the owner. This avoids the double
taxation that corporations face, where corporate profits are
taxed at the corporate level and then again as dividends at the
personal level.
Q5. What happens to a sole proprietorship when the owner
dies?
A) The business continues indefinitely
B) The business is transferred to a designated heir
C) The business ceases to exist
D) The business automatically becomes a corporation
Answer: C
Rationale: A sole proprietorship has a limited life—it ceases to
exist when the owner dies. Unlike a corporation, which has
perpetual existence, a sole proprietorship is tied to the life of its
owner.
Q6. The equity capital available to a sole proprietorship is
limited to:
A) The amount the owner can borrow from banks only
B) The owner's personal wealth
C) The number of shareholders willing to invest
D) The amount of corporate bonds issued
Answer: B
Rationale: The equity capital available to a sole proprietorship
(Verified Update)
This comprehensive study guide covers the core domains tested
on FINC 3610 Exam 1: Foundations of Finance & Time Value of
Money at Auburn University. It includes original practice
questions with detailed rationales, organized by the core exam
domains: Forms of Business Organization, Agency Conflicts &
Corporate Governance, Maximizing Shareholder Wealth, and
Time Value of Money (TVM).
Exam Overview & Blueprint:
Parameter Details
Exam
Multiple-choice, true/false, and calculation-based questions
Format
Sole proprietorships, partnerships, corporations, agency problems, corporate governance, shareholder
Core Topics
wealth maximization, future value, present value, annuities, perpetuities, compounding
Key
FV = PV(1+r)^t; PV = FV/(1+r)^t; FV of annuity; PV of annuity; PV of perpetuity
Formulas
2026 Focus NGN-style application problems, TVM calculations with financial calculators, agency cost identification
Section 1: Forms of Business Organization
,1.1 Sole Proprietorships
Q1. A business owned by a single individual, where there is no
legal distinction between the owner and the business, is called
a:
A) Corporation
B) Partnership
C) Sole proprietorship
D) Limited liability company
Answer: C
Rationale: A sole proprietorship is a business owned and
operated by one person. There is no legal distinction between
the owner and the business entity, meaning the owner is
personally liable for all business debts and obligations.
Q2. Which of the following is a primary advantage of a sole
proprietorship?
A) Unlimited liability
B) Easy and inexpensive to start
C) Double taxation
D) Perpetual existence
Answer: B
Rationale: The primary advantages of a sole proprietorship are
that it is easy and inexpensive to start, and the business income
,is taxed as personal income (avoiding double taxation). The
disadvantages include unlimited liability, limited life, and
difficulty transferring ownership.
Q3. Which of the following is a primary disadvantage of a sole
proprietorship?
A) Limited liability for the owner
B) Easy transfer of ownership
C) Unlimited personal liability
D) Double taxation of earnings
Answer: C
Rationale: The most significant disadvantage of a sole
proprietorship is unlimited personal liability. Creditors can go
after the owner's personal assets to satisfy business debts.
Other disadvantages include limited life (the business ends
when the owner dies) and limited capital (equity is limited to
the owner's personal wealth).
Q4. In a sole proprietorship, the business income is:
A) Taxed as corporate income
B) Taxed as personal income of the owner
C) Exempt from taxation
D) Subject to double taxation
Answer: B
Rationale: In a sole proprietorship, the business income is taxed
, as the personal income of the owner. This avoids the double
taxation that corporations face, where corporate profits are
taxed at the corporate level and then again as dividends at the
personal level.
Q5. What happens to a sole proprietorship when the owner
dies?
A) The business continues indefinitely
B) The business is transferred to a designated heir
C) The business ceases to exist
D) The business automatically becomes a corporation
Answer: C
Rationale: A sole proprietorship has a limited life—it ceases to
exist when the owner dies. Unlike a corporation, which has
perpetual existence, a sole proprietorship is tied to the life of its
owner.
Q6. The equity capital available to a sole proprietorship is
limited to:
A) The amount the owner can borrow from banks only
B) The owner's personal wealth
C) The number of shareholders willing to invest
D) The amount of corporate bonds issued
Answer: B
Rationale: The equity capital available to a sole proprietorship
