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Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 1 Corporate Finance and the Financial Manager
1.1 Why Study Finance?
1) The Valuation Principle shows how to make the costs and beneits of a decision
comparable so that we can evaluate them properly.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Financial decisions require that you weigh alternatives in strictly monetary terms.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
3) Which of the following best describes why the Valuation Principle is a key concept in
making inancial decisions?
A) It shows how to assign monetary value to intangibles such as good health and well-
being.
B) It allows ixed 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 beneits of a decision comparable so that we can
weigh them properly.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
1.2 The Four Types of Firms
1) Partnerships are the most common type of business irms in the world.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
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.
AACSB Objective: Analytic Skills
Author: DS
1
Question Status: Revised
3) Which of the following types of irms does NOT have limited liability?
A) sole proprietorships
B) limited partnerships
C) corporations
D) none of the above
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) Over four-ifths of all U.S. business revenue is generated by which type of irms?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
5) What is the most common type of irms in the United States and the world?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2
6) Which of the following is typically the major factor in limiting the growth of sole
proprietorships?
A) The organizational structure of such irms tends to become extremely complicated over
time.
B) It is extremely diicult to transfer control of such irms to a new owner if the present
owner dies or wishes to sell the irm.
C) The amount of money that can be raised by such irms 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 irms, leading
to confusion when conlicts in direction arise.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) Joe is a general partner in a limited partnership irm, while Jane is a limited partner in
the same irm. Which of the following statements regarding their respective relationships
to the irm is correct?
A) Joe has no management authority within the partnership.
B) Jane is legally involved in the managerial decision making of the irm.
C) Jane's liability for the irm's debts consists solely of her investment in the irm.
D) Withdrawal of Jane from the partnership will dissolve the partnership.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Revised
8) What is the major way in which the roles and obligations of the owners of a limited
liability company difer 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.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
9) In which of the following ways is a limited liability company like a corporation?
A) It was created and developed irst 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.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
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 deined, artiicial entity that is separate from its owners.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
11) Which of the following features of a corporation is LEAST accurate?
A) The owners' identity is 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.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4
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.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13) Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend
payment of $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
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
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
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Revised
5
15) Which of the following is unique for an S corporation?
A) The proits and losses of an S corporation are not taxed at the corporate level, but
shareholders must include these proits and losses on their individual tax returns.
B) The shareholders of an S corporation must include the irm's proit 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.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
16) You are a shareholder in a corporation which has elected subchapter S tax treatment.
The corporation announces a proit 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
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Revised
17) A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the
personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is
36%. What is the total amount of taxes paid if the company pays a $6.00 dividend?
A) $3.31
B) $4.96
C) $4.14
D) $5.79
AACSB Objective: Relective Thinking Skills
Author: WC
Question Status: New
6
18) An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the
personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is
36%. What is the total amount of taxes paid if the company pays a $5.00 dividend?
A) $3.28
B) $3.93
C) $2.62
D) $4.59
AACSB Objective: Relective Thinking Skills
Author: WC
Question Status: New
19) A C corporation earns $8.30 per share before taxes and the company pays a dividend of
$4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%,
and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an
individual would receive from the dividend?
A) $2.72
B) $4.08
C) $4.76
D) $3.40
AACSB Objective: Relective Thinking Skills
Author: WC
Question Status: Revised
20) A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the
personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is
39%. What is the total amount of taxes paid if the company pays a $3.00 dividend?
A) $1.68
B) $2.53
C) $2.11
D) $2.95
AACSB Objective: Relective Thinking Skills
Author: WC
Question Status: New
7
21) An S corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the
personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is
39%. What is the total amount of taxes paid if the company pays a $2.00 dividend?
A) $1.87
B) $2.81
C) $3.28
D) $2.34
AACSB Objective: Relective Thinking Skills
Author: WC
Question Status: New
22) Which of the following people may not manage the operations of a irm in which they
are part or full owners?
A) stockholders in S corporations
B) stockholders in C corporations
C) limited partners in a limited partnership
D) general partners in a limited partnership
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
23) What is the process of double taxation for the stockholders in a C corporation?
A) Their shares are taxed when they are both bought and sold.
B) The corporation is taxed on the proits it makes, and the owners are taxed when this
proit is distributed to them.
C) The owners of a corporation are taxed when they receive dividend payments and when
they make a proit from the sale of shares.
D) The corporation must pay taxes on any proits it makes, and the capital raised by the
sale of shares is also subject to taxation.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8
24) A sole proprietorship is owned by ________.
A) one person
B) two or more persons
C) shareholders
D) bankers
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
25) Which of the following organization forms has the most revenue?
A) S corporation
B) limited partnership
C) C corporation
D) limited liability company
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
26) Which of the following is NOT an advantage of a sole proprietorship?
A) single taxation
B) ease of setup
C) unlimited liability
D) no separation of ownership and control
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
27) 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
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
28) What are the main diferences between a partnership and a sole proprietorship?
AACSB Objective: Analytic Skills
Author: SS
9
Question Status: Revised
29) What are the main diferences between a limited partnership and a limited liability
corporation?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised
30) How is a corporation diferent from most of the other forms of business organizations?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised
1.3 The Financial Manager
1) The principal goal of a inancial manager is to maximize the wealth of the stockholders.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2) It is generally not the duty of inancial managers to ensure that a irm has the cash it
needs for day-to-day transactions.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Which of the following is a major duty of a inancial manager?
I. To make investment decisions
II. To make inancing decisions
III. To manage cash low from operating activities
A) I only
B) I and II only
C) I and III only
D) all of the above
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
10
