TEST BANK FOR s s s s
Corporate Finance, Canadian Edition, 5th edition Berk Chapter
ss ss ss ss ss ss ss
1-31
ss
Chapter 1 ss The Corporation ss
1.1 The Three Types of Firms ss ss ss ss
1) A sole proprietorship is owned by:
ss ss ss ss ss
A) one person ss
B) two or more peopless ss ss
C) shareholders
D) bankers
Answer:
ss
A
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
2) In Canada, which of the following organization forms accounts for the greatest number
ss ss ss ss ss ss ss ss ss ss ss ss
of firms?
ss ss
A) Limited Liability Partnership ss ss
B) Limited Partnership ss
C) Sole Proprietorship ss
D) PubliclyTraded Corporation s s
Answer: C
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
3) Which of the following organization forms earns the most revenue?
ss ss ss ss ss ss ss ss ss
A) Privately Owned Corporation ss ss
B) Limited Partnership ss
C) Publicly Owned Corporation ss ss
D) Limited LiabilityCompany bb s
Answer: C
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
4) Which of the following is NOT an advantage of a sole proprietorship?
ss ss ss ss ss ss ss ss ss ss ss
A) Single taxation ss
B) Ease of setup ss ss
C) Limited liability ss
D) No separation of ownership and control
ss ss ss ss ss
Answer: C
ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
1
© 2022 Pearson Canada
ss ss ss
Inc.
,5) Which of the following statements regarding limited partnerships is TRUE?
ss ss ss ss ss ss ss ss ss
A) There is no limit on a limited partner's liability.
ss ss ss ss ss ss ss ss
B) A limited partner's liability is limited by the amount of his investment.
ss ss ss ss ss ss ss ss ss ss ss
C) A limited partner is not liable until all of the assets of the general partners have
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
been exhausted.
ss ss
D) A general partner's liabilityis limited by the amount of his
ss ss ss s ss ss ss ss ss ss
investment. Answer: B
ss ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
6) Which of the following is/are an advantage(s) of incorporation?
ss ss ss ss ss ss ss ss
A) Access to capital markets ss ss ss
B) Limited liability ss
C) Unlimited life ss
D) All oftheaboves s s
Answer: D
ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
7) In Canada, a limited liability partnership, LLP, is essentially:
ss ss ss ss ss ss ss ss
A) a limited partnership without limited partners
ss ss ss ss ss
B) a limited partnership without a general partner
ss ss ss ss ss ss
C) just another name for a limited partnership
ss ss ss ss ss ss
D) just another name for a corporation
ss ss ss ss ss
Answer: B
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
8) In Canada, which of the following business organization forms cannot avoid double taxation?
ss ss ss ss ss ss ss ss ss ss ss ss
A) Limited Partnership ss
B) Publicly Traded Corporation ss s s
C) Privately Owned Corporation ss ss
D) Limited LiabilityCompany bb s
Answer: B
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
9) In Canada, the dividend tax credit gives some relief by:
ss ss ss ss ss ss ss ss ss
A) effectively giving a lower tax rate on dividend income than on other sources of income
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
B) effectively giving a higher tax rate on dividend income than on other sources of income
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
C) effectively giving the same tax rate on dividend income as on other sources of income
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
D) effectively giving a tax rate of zero on dividend income compared to other sources of
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
income Answer: A
ss ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
2
© 2022 Pearson Canada
ss ss ss
Inc.
,10) Which of the following statements is most correct?
ss ss ss ss ss ss ss
A) An advantage to incorporation is that it allows for less regulation of the business.
ss ss ss ss ss ss ss ss ss ss ss ss ss
B) An advantage of a corporation is that it is subject to double taxation.
ss ss ss ss ss ss ss ss ss ss ss ss
C) Unlike a partnership, a disadvantage of a corporation is that it has limited liability.
ss ss ss ss ss ss ss ss ss ss ss ss ss
D) Corporations face more regulations when compared to partnerships. ss ss ss ss ss ss ss
Answer: D
ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
11) In Canada, the distinguishing feature of a corporation is that:
ss ss ss ss ss ss ss ss ss
A) there is no legal difference between the corporation and its owners
ss ss ss ss ss ss ss ss ss ss
B) it is a legally defined, artificial being, separate from its owners
ss ss ss ss ss ss ss ss ss ss
C) it spreads liability for its corporate obligations to all shareholders
ss ss ss ss ss ss ss ss ss
D) it provides limited liabilityonly to small shareholders
ss ss ss s ss ss ss
Answer: B
ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
12) Which of the following is/are subject to double taxation in Canada?
ss ss ss ss ss ss ss ss ss ss
A) Corporation
B) Partnership
C) Sole proprietorship
ss
D) BothAandB s s s
Answer: A
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
13) Canada Revenue Agency, CRA, allows an exemption from double taxation for certain
ss ss ss ss ss ss ss ss ss ss ss
s flow through entities where all income produced by the business flows to the investors and
s ss ss ss ss ss ss ss ss ss ss ss ss ss ss
virtually no earnings are retained within the business. These entities are called:
ss ss ss ss ss ss ss ss ss ss ss ss
A) Canadian Federal Crown Corporations ss ss ss
B) Canadian Controlled Corporations ss ss
C) Income Trust Corporations ss ss
D) Foreign Controlled Corporations ss ss
Answer: C
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
3
© 2022 Pearson Canada
ss ss ss
Inc.
, 14) In 2006, the Canadian government effectively neutralized the tax advantages that had
ss ss ss ss ss ss ss ss ss ss ss
existed for most income trusts, relative to firms set up as corporations. The advantages that
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
existed for income trusts prior to these changes were that:
ss ss ss ss ss ss ss ss ss ss
A) income trusts avoided double taxation in that the Canada Revenue Agency did not
ss ss ss ss ss ss ss ss ss ss ss ss
collect corporate taxes but rather collected only personal taxes from income trust unit
ss ss ss ss ss ss ss ss ss ss ss ss ss
holders
ss
B) income trusts effectively afforded unlimited liabilityto unit holders while
ss ss ss ss ss s ss ss ss
corporate shareholders could face unlimited liability
ss ss ss ss ss ss
C) while double taxation existed for both income trusts and corporations, the net tax paid
ss ss ss ss ss ss ss ss ss ss ss ss ss
by income trust unit holders was in most cases less than that paid by corporate
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
shareholders
ss
D) the changes introduced in 2006 eliminated double taxation for corporations, thereby
ss ss ss ss ss ss ss ss ss ss
making the taxation of income trusts and corporations substantially equivalent
ss ss s s ss s s s s s s ss s s ss
Answer: A
ss
Explanation: The 2006 changes imposed new taxes on most income trusts to mirror the s s ss ss ss ss ss ss ss ss ss ss ss ss
total tax revenue received from corporations. As a result with no material tax advantage,
ss ss ss ss ss ss s s ss ss ss ss ss ss ss
these firms reverted from income trusts back to a corporate structure. The exception was
ss s s ss ss ss ss ss ss ss ss ss s s ss ss
Real Estate Investment Trusts (REIT) which are exempted from the changes imposed on all
ss s s ss ss ss ss ss ss ss ss ss ss ss ss
other trusts.
ss ss
Diff: 2 Type: MC ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
15) One of the major characteristics of a limited liability partnership, LLP, in Canada is:
ss ss ss ss ss ss ss ss ss ss ss ss ss
A) the limitation on a partner's liability is only in cases related to actions of negligence by
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
other partners or those supervised by other partners
ss ss ss ss ss ss ss ss
B) any partner will not be liable for his or her negligence at any time
ss ss ss ss ss ss ss ss ss ss ss ss ss
C) any partners will be only liable for other partners' negligence
ss ss ss ss ss ss ss ss ss
D) noneoftheabove s s s
Answer: A
ss s s
Diff: 2 Type: MC ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
16) You own 100 shares of a publicly traded Canadian Corporation. The corporation earns
ss ss ss ss ss ss ss ss ss ss ss ss
$5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due,
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the
s s ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend)
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
income is 30%, then how much money is left for you after all taxes have been
ss ss ss s s ss s s s s ss s s s s s s s s s s s s ss s s
paid?
s s
A) $210
B) $300
C) $350
D) $500
Answer: A
Explanation: EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate) ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
$5.00 per share × 100 shares × (1 - .40) × (1 - .30) =
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
$210 Diff: 3 Type: MC ss ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
4
© 2022 Pearson Canada
ss ss ss
Inc.
Corporate Finance, Canadian Edition, 5th edition Berk Chapter
ss ss ss ss ss ss ss
1-31
ss
Chapter 1 ss The Corporation ss
1.1 The Three Types of Firms ss ss ss ss
1) A sole proprietorship is owned by:
ss ss ss ss ss
A) one person ss
B) two or more peopless ss ss
C) shareholders
D) bankers
Answer:
ss
A
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
2) In Canada, which of the following organization forms accounts for the greatest number
ss ss ss ss ss ss ss ss ss ss ss ss
of firms?
ss ss
A) Limited Liability Partnership ss ss
B) Limited Partnership ss
C) Sole Proprietorship ss
D) PubliclyTraded Corporation s s
Answer: C
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
3) Which of the following organization forms earns the most revenue?
ss ss ss ss ss ss ss ss ss
A) Privately Owned Corporation ss ss
B) Limited Partnership ss
C) Publicly Owned Corporation ss ss
D) Limited LiabilityCompany bb s
Answer: C
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
4) Which of the following is NOT an advantage of a sole proprietorship?
ss ss ss ss ss ss ss ss ss ss ss
A) Single taxation ss
B) Ease of setup ss ss
C) Limited liability ss
D) No separation of ownership and control
ss ss ss ss ss
Answer: C
ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
1
© 2022 Pearson Canada
ss ss ss
Inc.
,5) Which of the following statements regarding limited partnerships is TRUE?
ss ss ss ss ss ss ss ss ss
A) There is no limit on a limited partner's liability.
ss ss ss ss ss ss ss ss
B) A limited partner's liability is limited by the amount of his investment.
ss ss ss ss ss ss ss ss ss ss ss
C) A limited partner is not liable until all of the assets of the general partners have
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
been exhausted.
ss ss
D) A general partner's liabilityis limited by the amount of his
ss ss ss s ss ss ss ss ss ss
investment. Answer: B
ss ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
6) Which of the following is/are an advantage(s) of incorporation?
ss ss ss ss ss ss ss ss
A) Access to capital markets ss ss ss
B) Limited liability ss
C) Unlimited life ss
D) All oftheaboves s s
Answer: D
ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
7) In Canada, a limited liability partnership, LLP, is essentially:
ss ss ss ss ss ss ss ss
A) a limited partnership without limited partners
ss ss ss ss ss
B) a limited partnership without a general partner
ss ss ss ss ss ss
C) just another name for a limited partnership
ss ss ss ss ss ss
D) just another name for a corporation
ss ss ss ss ss
Answer: B
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
8) In Canada, which of the following business organization forms cannot avoid double taxation?
ss ss ss ss ss ss ss ss ss ss ss ss
A) Limited Partnership ss
B) Publicly Traded Corporation ss s s
C) Privately Owned Corporation ss ss
D) Limited LiabilityCompany bb s
Answer: B
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
9) In Canada, the dividend tax credit gives some relief by:
ss ss ss ss ss ss ss ss ss
A) effectively giving a lower tax rate on dividend income than on other sources of income
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
B) effectively giving a higher tax rate on dividend income than on other sources of income
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
C) effectively giving the same tax rate on dividend income as on other sources of income
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
D) effectively giving a tax rate of zero on dividend income compared to other sources of
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
income Answer: A
ss ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
2
© 2022 Pearson Canada
ss ss ss
Inc.
,10) Which of the following statements is most correct?
ss ss ss ss ss ss ss
A) An advantage to incorporation is that it allows for less regulation of the business.
ss ss ss ss ss ss ss ss ss ss ss ss ss
B) An advantage of a corporation is that it is subject to double taxation.
ss ss ss ss ss ss ss ss ss ss ss ss
C) Unlike a partnership, a disadvantage of a corporation is that it has limited liability.
ss ss ss ss ss ss ss ss ss ss ss ss ss
D) Corporations face more regulations when compared to partnerships. ss ss ss ss ss ss ss
Answer: D
ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
11) In Canada, the distinguishing feature of a corporation is that:
ss ss ss ss ss ss ss ss ss
A) there is no legal difference between the corporation and its owners
ss ss ss ss ss ss ss ss ss ss
B) it is a legally defined, artificial being, separate from its owners
ss ss ss ss ss ss ss ss ss ss
C) it spreads liability for its corporate obligations to all shareholders
ss ss ss ss ss ss ss ss ss
D) it provides limited liabilityonly to small shareholders
ss ss ss s ss ss ss
Answer: B
ss s s
Diff: 2 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
12) Which of the following is/are subject to double taxation in Canada?
ss ss ss ss ss ss ss ss ss ss
A) Corporation
B) Partnership
C) Sole proprietorship
ss
D) BothAandB s s s
Answer: A
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
13) Canada Revenue Agency, CRA, allows an exemption from double taxation for certain
ss ss ss ss ss ss ss ss ss ss ss
s flow through entities where all income produced by the business flows to the investors and
s ss ss ss ss ss ss ss ss ss ss ss ss ss ss
virtually no earnings are retained within the business. These entities are called:
ss ss ss ss ss ss ss ss ss ss ss ss
A) Canadian Federal Crown Corporations ss ss ss
B) Canadian Controlled Corporations ss ss
C) Income Trust Corporations ss ss
D) Foreign Controlled Corporations ss ss
Answer: C
ss s s
Diff: 1 Type: MC
ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
3
© 2022 Pearson Canada
ss ss ss
Inc.
, 14) In 2006, the Canadian government effectively neutralized the tax advantages that had
ss ss ss ss ss ss ss ss ss ss ss
existed for most income trusts, relative to firms set up as corporations. The advantages that
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
existed for income trusts prior to these changes were that:
ss ss ss ss ss ss ss ss ss ss
A) income trusts avoided double taxation in that the Canada Revenue Agency did not
ss ss ss ss ss ss ss ss ss ss ss ss
collect corporate taxes but rather collected only personal taxes from income trust unit
ss ss ss ss ss ss ss ss ss ss ss ss ss
holders
ss
B) income trusts effectively afforded unlimited liabilityto unit holders while
ss ss ss ss ss s ss ss ss
corporate shareholders could face unlimited liability
ss ss ss ss ss ss
C) while double taxation existed for both income trusts and corporations, the net tax paid
ss ss ss ss ss ss ss ss ss ss ss ss ss
by income trust unit holders was in most cases less than that paid by corporate
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
shareholders
ss
D) the changes introduced in 2006 eliminated double taxation for corporations, thereby
ss ss ss ss ss ss ss ss ss ss
making the taxation of income trusts and corporations substantially equivalent
ss ss s s ss s s s s s s ss s s ss
Answer: A
ss
Explanation: The 2006 changes imposed new taxes on most income trusts to mirror the s s ss ss ss ss ss ss ss ss ss ss ss ss
total tax revenue received from corporations. As a result with no material tax advantage,
ss ss ss ss ss ss s s ss ss ss ss ss ss ss
these firms reverted from income trusts back to a corporate structure. The exception was
ss s s ss ss ss ss ss ss ss ss ss s s ss ss
Real Estate Investment Trusts (REIT) which are exempted from the changes imposed on all
ss s s ss ss ss ss ss ss ss ss ss ss ss ss
other trusts.
ss ss
Diff: 2 Type: MC ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
15) One of the major characteristics of a limited liability partnership, LLP, in Canada is:
ss ss ss ss ss ss ss ss ss ss ss ss ss
A) the limitation on a partner's liability is only in cases related to actions of negligence by
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
other partners or those supervised by other partners
ss ss ss ss ss ss ss ss
B) any partner will not be liable for his or her negligence at any time
ss ss ss ss ss ss ss ss ss ss ss ss ss
C) any partners will be only liable for other partners' negligence
ss ss ss ss ss ss ss ss ss
D) noneoftheabove s s s
Answer: A
ss s s
Diff: 2 Type: MC ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
16) You own 100 shares of a publicly traded Canadian Corporation. The corporation earns
ss ss ss ss ss ss ss ss ss ss ss ss
$5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due,
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the
s s ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend)
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
income is 30%, then how much money is left for you after all taxes have been
ss ss ss s s ss s s s s ss s s s s s s s s s s s s ss s s
paid?
s s
A) $210
B) $300
C) $350
D) $500
Answer: A
Explanation: EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate) ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
$5.00 per share × 100 shares × (1 - .40) × (1 - .30) =
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
$210 Diff: 3 Type: MC ss ss ss
Topic: 1.1 The Three Types of Firms ss ss ss ss
4
© 2022 Pearson Canada
ss ss ss
Inc.
