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Test Bank for Corporate Finance, 6th Canadian Edition by
4) Which of the following is NOT an advantage of a sole proprietorship?
Jonathan Berk, Peter DeMarzo - Complete Chapters A) Single taxation
Included (Chap 1 to 31) A+ B) Ease of setup
C) Limited liability
Chapter 1 The Corporation and Financial Markets
D) No separation of ownership and control Answer: C
Diff: 2 Type: MC
1.1 The Three Types of Firms
Topic : 1.1 The Three Types of Firms
1) A sole proprietorship is owned by:
5) Which of the following statements regarding limited partnerships is true?
A) one person.
A) There is no limit on a limited partner's liability.
B) two or more people.
B) A limited partner's liability is limited by the amount of his investment.
C) shareholders.
C) A limited partner is not liable until all of the assets of the general partners have been
D) bankers. Answer: A
exhausted.
Diff: 1 Type: MC
D) A general partner's liability is limited by the amount of his investment. Answer: B
Topic : 1.1 The Three Types of Firms
Diff: 2 Type: MC
Topic : 1.1 The Three Types of Firms
2) Which of the following organization forms is the most common in the economy?
A) Limited Liability Partnership
6) Which of the following are advantages of incorporation?
B) Limited Partnership
A) Access to capital markets
C) Sole Proprietorship
B) Limited liability
D) Publicly Traded Corporation Answer: C
C) Unlimited life
Diff: 1 Type: MC
D) All of the above Answer: D
Topic : 1.1 The Three Types of Firms
Diff: 2 Type: MC
Topic : 1.1 The Three Types of Firms
3) Which of the following organization forms earns the most revenue?
A) Privately Owned Corporation
7) In Canada, a limited liability partnership, LLP, is essentially:
B) Limited Partnership
A) a limited partnership without limited partners.
C) Publicly Owned Corporation
B) a limited partnership without a general partner.
D) Limited Liability Company Answer: C
C) just another name for a limited partnership.
Diff: 1 Type: MC
D) just another name for a corporation. Answer: B
Topic : 1.1 The Three Types of Firms
A+ Page 1 A+ Page 2
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Diff: 1 Type: MC C) it spreads liability for its corporate obligations to all shareholders.
Topic : 1.1 The Three Types of Firms D) it provides limited liability only to small shareholders. Answer: B
Diff: 2 Type: MC
8) In Canada, which of the following business organization forms cannot avoid double Topic : 1.1 The Three Types of Firms
taxation?
A) Limited Partnership 12) Which of the following is subject to double taxation in Canada?
B) Publicly Traded Corporation A) Corporation
C) Privately Owned Corporation B) Partnership
D) Limited Liability Company Answer: B C) Sole proprietorship
Diff: 1 Type: MC D) Both A and B Answer: A
Topic : 1.1 The Three Types of Firms Diff: 1 Type: MC
Topic : 1.1 The Three Types of Firms
9) In Canada, the dividend tax credit gives some relief by effectively giving:
A) a lower tax rate on dividend income than on other sources of income. 13) The Canada Revenue Agency, CRA, allows an exemption from double taxation for
B) a higher tax rate on dividend income than on other sources of income. certain flow- through entities where all income produced by the business flows to the investors
C) the same tax rate on dividend income as on other sources of income. and virtually no earnings are retained within the business. These entities are called:
D) a tax rate of zero on dividend income compared to other sources of income. Answer: A A) Canadian Federal Crown Corporations.
Diff: 1 Type: MC B) Canadian Controlled Corporations.
Topic : 1.1 The Three Types of Firms C) Income Trust Corporations.
D) Foreign Controlled Corporations. Answer: C
10) Which of the following statements is most correct? Diff: 1 Type: MC
A) An advantage to incorporation is that it allows for less business regulation. Topic : 1.1 The Three Types of Firms
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 it has limited liability. 14) In 2006, the Canadian government effectively neutralized the tax advantages that had
D) Corporations face more regulations when compared to partnerships. Answer: D existed for most income trusts, relative to firms set up as corporations. The advantages that
Diff: 2 Type: MC existed for income trusts before these changes were that:
Topic : 1.1 The Three Types of Firms 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.
11) In Canada, the distinguishing feature of a corporation is that: B) income trusts effectively afforded unlimited liability to unitholders while corporate
A) there is no legal difference between the corporation and its owners. shareholders could face unlimited liability.
B) it is a legally defined, artificial being, separate from its owners.
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C) while double taxation existed for both income trusts and corporations, the net tax paid by $5.00 per share × 100 shares × (1 - .40) × (1 - .30) = $210
income trust unit holders was in most cases less than that paid by corporate shareholders. Diff: 3 Type: MC
D) the changes introduced in 2006 eliminated double taxation for corporations, thereby Topic : 1.1 The Three Types of Firms
making the taxation of income trusts and corporations substantially equivalent.
Answer: A 17) You own 100 shares of a Canadian Income Trust Corporation. The corporation earns
Explanation: The 2006 changes imposed new taxes on most income trusts to mirror the total tax $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it
revenue received from corporations. As a result, with no material tax advantage, these firms will distribute the rest of its earnings to its shareholders in the form of a dividend. If the
reverted from income trusts back to a corporate structure. The exception was Real Estate corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income
Investment Trusts (REIT), which are exempted from the changes imposed on all other trusts. is 30%, then how much money is left for you after all taxes have been paid?
Diff: 2 Type: MC A) $210
Topic : 1.1 The Three Types of Firms B) $300
C) $350
15) One of the major characteristics of a limited liability partnership, LLP, in Canada is: D) $500 Answer: C
A) the limitation on a partner's liability is only in cases related to actions of negligence by Explanation: EPS × number of shares × (1 - Individual Tax Rate)
other partners or those supervised by other partners. $5.00 per share × 100 shares × (1 - .30) = $350
B) any partner will not be liable for their own negligence at any time. Diff: 3 Type: MC
C) any partners will be only liable for other partners' negligence. Topic : 1.1 The Three Types of Firms
D) none of the above. Answer: A
Diff: 2 Type: MC 18) You are a shareholder in a publicly owned corporation. This corporation earns $4 per
Topic : 1.1 The Three Types of Firms 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
16) You own 100 shares of a publicly traded Canadian Corporation. The corporation earns corporate tax rate is 35%, and your tax rate on dividend income is 15%. The effective tax rate on
$5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it your share of the corporation's earnings is closest to:
will distribute the rest of its earnings to its shareholders in the form of a dividend. If the A) 15%.
corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income B) 35%.
is 30%, then how much money is left for you after all taxes have been paid? C) 45%.
A) $210 D) 50%.
B) $300 Answer: C
C) $350 Explanation: First, the corporation pays taxes. It earned $4 per share, but it must pay $4 × .35 =
D) $500 Answer: A $1.40 to the government in corporate taxes. That leaves $4.00 - $1.40 = $2.60 to distribute to the
Explanation: EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate) shareholders.
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However, the shareholder must pay $2.60 × .15 = $0.39 in income taxes on this amount, leaving (Note: If Pdf file then just click on link, if MS word file then press Ctrl + left click on it to
only $2.21 to the shareholder after all taxes are paid. The total amount paid in taxes is $1.40 + open file)
0.39 = $1.79. The effective tax rate is then $1.79 ÷ $4 = .4475 or 44.75% which is closest to To Download Complete File, please click on below link
45%.
Diff: 3 Type: MC Or
Topic : 1.1 The Three Types of Firms Copy the link and paste it into your internet browser
https://drive.google.com/file/d/1BGYotYsNe6bOCaOjjmWoCYLac_3cBXMC/view?usp=sh
19) Explain the benefits of incorporation. Answer:
aring
1. Limited liability
2. Unlimited life
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
20) What is the legal requirement for forming a Corporation in Canada?
Answer: Articles of incorporation must be filed with the relevant registrar of corporations. The
articles of incorporation are like a corporate constitution that sets out the terms of the
corporation's ownership and existence.
Diff: 2 Type: SA
Topic : 1.1 The Three Types of Firms
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Test Bank for Corporate Finance, 6th Canadian Edition by
4) Which of the following is NOT an advantage of a sole proprietorship?
Jonathan Berk, Peter DeMarzo - Complete Chapters A) Single taxation
Included (Chap 1 to 31) A+ B) Ease of setup
C) Limited liability
Chapter 1 The Corporation and Financial Markets
D) No separation of ownership and control Answer: C
Diff: 2 Type: MC
1.1 The Three Types of Firms
Topic : 1.1 The Three Types of Firms
1) A sole proprietorship is owned by:
5) Which of the following statements regarding limited partnerships is true?
A) one person.
A) There is no limit on a limited partner's liability.
B) two or more people.
B) A limited partner's liability is limited by the amount of his investment.
C) shareholders.
C) A limited partner is not liable until all of the assets of the general partners have been
D) bankers. Answer: A
exhausted.
Diff: 1 Type: MC
D) A general partner's liability is limited by the amount of his investment. Answer: B
Topic : 1.1 The Three Types of Firms
Diff: 2 Type: MC
Topic : 1.1 The Three Types of Firms
2) Which of the following organization forms is the most common in the economy?
A) Limited Liability Partnership
6) Which of the following are advantages of incorporation?
B) Limited Partnership
A) Access to capital markets
C) Sole Proprietorship
B) Limited liability
D) Publicly Traded Corporation Answer: C
C) Unlimited life
Diff: 1 Type: MC
D) All of the above Answer: D
Topic : 1.1 The Three Types of Firms
Diff: 2 Type: MC
Topic : 1.1 The Three Types of Firms
3) Which of the following organization forms earns the most revenue?
A) Privately Owned Corporation
7) In Canada, a limited liability partnership, LLP, is essentially:
B) Limited Partnership
A) a limited partnership without limited partners.
C) Publicly Owned Corporation
B) a limited partnership without a general partner.
D) Limited Liability Company Answer: C
C) just another name for a limited partnership.
Diff: 1 Type: MC
D) just another name for a corporation. Answer: B
Topic : 1.1 The Three Types of Firms
A+ Page 1 A+ Page 2
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Diff: 1 Type: MC C) it spreads liability for its corporate obligations to all shareholders.
Topic : 1.1 The Three Types of Firms D) it provides limited liability only to small shareholders. Answer: B
Diff: 2 Type: MC
8) In Canada, which of the following business organization forms cannot avoid double Topic : 1.1 The Three Types of Firms
taxation?
A) Limited Partnership 12) Which of the following is subject to double taxation in Canada?
B) Publicly Traded Corporation A) Corporation
C) Privately Owned Corporation B) Partnership
D) Limited Liability Company Answer: B C) Sole proprietorship
Diff: 1 Type: MC D) Both A and B Answer: A
Topic : 1.1 The Three Types of Firms Diff: 1 Type: MC
Topic : 1.1 The Three Types of Firms
9) In Canada, the dividend tax credit gives some relief by effectively giving:
A) a lower tax rate on dividend income than on other sources of income. 13) The Canada Revenue Agency, CRA, allows an exemption from double taxation for
B) a higher tax rate on dividend income than on other sources of income. certain flow- through entities where all income produced by the business flows to the investors
C) the same tax rate on dividend income as on other sources of income. and virtually no earnings are retained within the business. These entities are called:
D) a tax rate of zero on dividend income compared to other sources of income. Answer: A A) Canadian Federal Crown Corporations.
Diff: 1 Type: MC B) Canadian Controlled Corporations.
Topic : 1.1 The Three Types of Firms C) Income Trust Corporations.
D) Foreign Controlled Corporations. Answer: C
10) Which of the following statements is most correct? Diff: 1 Type: MC
A) An advantage to incorporation is that it allows for less business regulation. Topic : 1.1 The Three Types of Firms
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 it has limited liability. 14) In 2006, the Canadian government effectively neutralized the tax advantages that had
D) Corporations face more regulations when compared to partnerships. Answer: D existed for most income trusts, relative to firms set up as corporations. The advantages that
Diff: 2 Type: MC existed for income trusts before these changes were that:
Topic : 1.1 The Three Types of Firms 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.
11) In Canada, the distinguishing feature of a corporation is that: B) income trusts effectively afforded unlimited liability to unitholders while corporate
A) there is no legal difference between the corporation and its owners. shareholders could face unlimited liability.
B) it is a legally defined, artificial being, separate from its owners.
A+ Page 3 A+ Page 4
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C) while double taxation existed for both income trusts and corporations, the net tax paid by $5.00 per share × 100 shares × (1 - .40) × (1 - .30) = $210
income trust unit holders was in most cases less than that paid by corporate shareholders. Diff: 3 Type: MC
D) the changes introduced in 2006 eliminated double taxation for corporations, thereby Topic : 1.1 The Three Types of Firms
making the taxation of income trusts and corporations substantially equivalent.
Answer: A 17) You own 100 shares of a Canadian Income Trust Corporation. The corporation earns
Explanation: The 2006 changes imposed new taxes on most income trusts to mirror the total tax $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it
revenue received from corporations. As a result, with no material tax advantage, these firms will distribute the rest of its earnings to its shareholders in the form of a dividend. If the
reverted from income trusts back to a corporate structure. The exception was Real Estate corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income
Investment Trusts (REIT), which are exempted from the changes imposed on all other trusts. is 30%, then how much money is left for you after all taxes have been paid?
Diff: 2 Type: MC A) $210
Topic : 1.1 The Three Types of Firms B) $300
C) $350
15) One of the major characteristics of a limited liability partnership, LLP, in Canada is: D) $500 Answer: C
A) the limitation on a partner's liability is only in cases related to actions of negligence by Explanation: EPS × number of shares × (1 - Individual Tax Rate)
other partners or those supervised by other partners. $5.00 per share × 100 shares × (1 - .30) = $350
B) any partner will not be liable for their own negligence at any time. Diff: 3 Type: MC
C) any partners will be only liable for other partners' negligence. Topic : 1.1 The Three Types of Firms
D) none of the above. Answer: A
Diff: 2 Type: MC 18) You are a shareholder in a publicly owned corporation. This corporation earns $4 per
Topic : 1.1 The Three Types of Firms 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
16) You own 100 shares of a publicly traded Canadian Corporation. The corporation earns corporate tax rate is 35%, and your tax rate on dividend income is 15%. The effective tax rate on
$5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it your share of the corporation's earnings is closest to:
will distribute the rest of its earnings to its shareholders in the form of a dividend. If the A) 15%.
corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income B) 35%.
is 30%, then how much money is left for you after all taxes have been paid? C) 45%.
A) $210 D) 50%.
B) $300 Answer: C
C) $350 Explanation: First, the corporation pays taxes. It earned $4 per share, but it must pay $4 × .35 =
D) $500 Answer: A $1.40 to the government in corporate taxes. That leaves $4.00 - $1.40 = $2.60 to distribute to the
Explanation: EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate) shareholders.
A+ Page 5 A+ Page 6
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However, the shareholder must pay $2.60 × .15 = $0.39 in income taxes on this amount, leaving (Note: If Pdf file then just click on link, if MS word file then press Ctrl + left click on it to
only $2.21 to the shareholder after all taxes are paid. The total amount paid in taxes is $1.40 + open file)
0.39 = $1.79. The effective tax rate is then $1.79 ÷ $4 = .4475 or 44.75% which is closest to To Download Complete File, please click on below link
45%.
Diff: 3 Type: MC Or
Topic : 1.1 The Three Types of Firms Copy the link and paste it into your internet browser
https://drive.google.com/file/d/1BGYotYsNe6bOCaOjjmWoCYLac_3cBXMC/view?usp=sh
19) Explain the benefits of incorporation. Answer:
aring
1. Limited liability
2. Unlimited life
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
20) What is the legal requirement for forming a Corporation in Canada?
Answer: Articles of incorporation must be filed with the relevant registrar of corporations. The
articles of incorporation are like a corporate constitution that sets out the terms of the
corporation's ownership and existence.
Diff: 2 Type: SA
Topic : 1.1 The Three Types of Firms
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