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 benefits of a decision
comparable so that we can evaluate them properly.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Financial decisions require that you weigh alternatives in strictly monetary terms.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
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 financial decisions?
A) It shows how to assign monetary value to intangibles such as good health and well-
being.
B) It allows fixed 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 benefits of a decision comparable so that we can
weigh them properly.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
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 firms in the world.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
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.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
1
Copyright © 2015 Pearson Education, Inc.
,Question Status: Revised
3) Which of the following types of firms does NOT have limited liability?
A) sole proprietorships
B) limited partnerships
C) corporations
D) none of the above
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) Over four-fifths of all U.S. business revenue is generated by which type of firms?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
5) What is the most common type of firms in the United States and the world?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2
Copyright © 2015 Pearson Education, Inc.
, 6) Which of the following is typically the major factor in limiting the growth of sole
proprietorships?
A) The organizational structure of such firms tends to become extremely complicated over
time.
B) It is extremely difficult to transfer control of such firms to a new owner if the present
owner dies or wishes to sell the firm.
C) The amount of money that can be raised by such firms 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 firms, leading
to confusion when conflicts in direction arise.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in
the same firm. Which of the following statements regarding their respective relationships
to the firm is correct?
A) Joe has no management authority within the partnership.
B) Jane is legally involved in the managerial decision making of the firm.
C) Jane's liability for the firm's debts consists solely of her investment in the firm.
D) Withdrawal of Jane from the partnership will dissolve the partnership.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective 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 differ 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.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
Copyright © 2015 Pearson Education, Inc.
Chapter 1 Corporate Finance and the Financial Manager
1.1 Why Study Finance?
1) The Valuation Principle shows how to make the costs and benefits of a decision
comparable so that we can evaluate them properly.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Financial decisions require that you weigh alternatives in strictly monetary terms.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
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 financial decisions?
A) It shows how to assign monetary value to intangibles such as good health and well-
being.
B) It allows fixed 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 benefits of a decision comparable so that we can
weigh them properly.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
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 firms in the world.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
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.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
1
Copyright © 2015 Pearson Education, Inc.
,Question Status: Revised
3) Which of the following types of firms does NOT have limited liability?
A) sole proprietorships
B) limited partnerships
C) corporations
D) none of the above
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) Over four-fifths of all U.S. business revenue is generated by which type of firms?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
5) What is the most common type of firms in the United States and the world?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2
Copyright © 2015 Pearson Education, Inc.
, 6) Which of the following is typically the major factor in limiting the growth of sole
proprietorships?
A) The organizational structure of such firms tends to become extremely complicated over
time.
B) It is extremely difficult to transfer control of such firms to a new owner if the present
owner dies or wishes to sell the firm.
C) The amount of money that can be raised by such firms 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 firms, leading
to confusion when conflicts in direction arise.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in
the same firm. Which of the following statements regarding their respective relationships
to the firm is correct?
A) Joe has no management authority within the partnership.
B) Jane is legally involved in the managerial decision making of the firm.
C) Jane's liability for the firm's debts consists solely of her investment in the firm.
D) Withdrawal of Jane from the partnership will dissolve the partnership.
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective 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 differ 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.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
Copyright © 2015 Pearson Education, Inc.
