Test Bank for Corporate Finance, 5th Edition

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Corporate FinanceFifthEditionJonathan BerkPeter DeMarzoCorporate FinanceTest Bank(Download Only),5eByMichael J. Woodworth

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1Corporate Finance, 5e(Berk/DeMarzo)Chapter 1The Corporation1.1The Four Types of Firms1) A sole proprietorship is owned by:A) one person.B) two or more persons.C) shareholders.D) bankers.Answer: ADiff: 1Section:1.1 The Four Types of FirmsSkill: Definition2) Which of the following organization forms for a business does NOT avoid double taxation?A) Limited partnershipB) "C" corporationC) "S" corporationD) Limited liability companyAnswer: BDiff: 1Section: 1.1 The Four Types ofFirmsSkill: Conceptual3) Which of the following organization forms accounts for the most revenue?A) "S" corporationB) Limited partnershipC) "C" corporationD) Limited liability companyAnswer: CDiff: 1Section:1.1 The Four Types of FirmsSkill:Conceptual4) Which of the following organization forms accounts for the greatest number of firms?A) "S" corporationB) Limited partnershipC) Sole proprietorshipD) "C" corporationAnswer: CDiff: 1Section: 1.1 TheFour Types of FirmsSkill: Conceptual

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25) Which of the following is NOT an advantage of a sole proprietorship?A) Single taxationB) Ease of setupC) Limited liabilityD) No separation of ownership and controlAnswer: CDiff: 2Section: 1.1 The Four Types of FirmsSkill: Conceptual6) Which of the following statements regarding limited partnerships is TRUE?A) There is no limit on a limited partner's liability.B) A limited partner's liability is limited by the amount of their investment.C)A limited partner is not liable until allthe assets of the general partners have been exhausted.D) A general partner's liability is limited by the amount of their investment.Answer: BDiff: 2Section: 1.1 The Four Types of FirmsSkill: Conceptual7)Which of the following is/are an advantage of incorporation?A) Access to capital marketsB) Limited liabilityC) Unlimited lifeD) All of the aboveAnswer: DDiff: 2Section: 1.1 The Four Types of FirmsSkill: Conceptual8) Which of the following statements is most correct?A) An advantage to incorporation is that it allows for less regulation of the business.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 ithas limited liability.D) Corporations face more regulations when compared to partnerships.Answer: DDiff: 2Section: 1.1 The Four Types of FirmsSkill: Conceptual9) A limited liability company is essentially:A) a limited partnership without limitedpartners.B) a limited partnership without a general partner.C) just another name for a limited partnership with a general partner.D) just another name for a corporation.Answer: BDiff: 1Section:1.1 The Four Types of FirmsSkill: Conceptual

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310) The distinguishing feature of a corporationis that:A) there is no legal difference between the corporation and its owners.B) it is a legally defined, artificial being, separate from its owners.C) it spreads liability for its corporate obligations to all shareholders.D) it provides limited liability only to small shareholders.Answer: BDiff: 2Section: 1.1 The Four Types of FirmsSkill: Conceptual11) Which of the following are subject to double taxation?A) CorporationB) PartnershipC) Sole proprietorshipD) A and BAnswer: ADiff: 1Section: 1.1 The Four Types of FirmsSkill: Conceptual12) You own 100 shares of a "C" corporation. The corporation earns $5.00 per share before taxes. Once thecorporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to itsshareholders in the form of a dividend. If the corporate tax rate is 21% and your personal tax rate on(both dividend and non-dividend) income is 30%,then how much money is left for you after all taxeshave been paid?A) $276.50B) $300.00C) $350.00D) $500.00Answer: AExplanation: EPS × number of shares × (1-Corporate Tax Rate) × (1-Individual Tax Rate)$5.00 per share ×100 shares × (1-.21) × (1-.30) = $276.50Diff: 2Section: 1.1 The Four Types of FirmsSkill: Analytical

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413) You own 100 shares of a Sub Chapter "S" corporation. The corporation earns $5.00 per share beforetaxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of itsearnings to its shareholders in the form of a dividend. If the corporate tax rate is 21% and your personaltax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you afterall taxes have been paid?A) $210B) $300C) $350D) $500Answer: CExplanation: EPS × number of shares × (1-Individual Tax Rate)$5.00 per share × 100 shares × (1-.30) = $350Diff: 2Section: 1.1 The Four Types of FirmsSkill: Analytical14) You are a shareholder in a "C" corporation. This corporation earns $4 per share before taxes. After ithas paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend isincome to you, so you will then pay taxes on these earnings. The corporate tax rate is 21% and your taxrate on dividend income is 15%. The effective taxrate on your share of the corporation's earnings isclosest to:A) 15%.B) 33%.C) 45%.D) 50%.Answer: BExplanation:First the corporation pays taxes. It earned $4 per share, but must pay $4 × .21 = $0.84 to thegovernment in corporate taxes. That leaves $4.00-$0.84 = $3.16 to distribute to the shareholders.However, the shareholder must pay $3.16 × .15 = $0.47 in income taxes on this amount, leaving only $2.69to the shareholder after all taxes are paid. The total amount paid in taxes is $0.84 + 0.47= $1.31. Theeffective tax rate is then $1.31 ÷ $4 = .3275 or 32.75% which is closest to 33%.Diff: 3Section: 1.1 TheFour Types of FirmsSkill: Analytical

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515) Explain the benefits of incorporation.Answer:1.Limited liability2.Unlimited life3.Access to capital markets/availability of outside fundingDiff: 2Section: 1.1 The Four Types of FirmsSkill: Conceptual16) Explain the difference between a sub-chapter "S" corporation and a sub-chapter "C" corporation.Answer:"C" Corporation"S" CorporationPublicly traded stockPrivately traded stockUnlimited shareholdersNo more than 100 shareholdersDouble taxationTaxed like a partnershipDiff: 2Section: 1.1 The Four Types of FirmsSkill: Conceptual1.2Ownership Versus Control of Corporations1) In a corporation, the ultimate decisions regarding business matters are made by:A) the Board of Directors.B) debt holders.C) shareholders.D) investors.Answer: ADiff: 1Section: 1.2 Ownership Versus Control of CorporationsSkill: Conceptual2)The person charged with running the corporation by instituting the rules and policies set by the boardof directors is called:A) the chief operating officer.B) the company president.C) the chief executive officer.D) the chief financial officer.Answer:CDiff: 1Section: 1.2 Ownership Versus Control of CorporationsSkill: Definition

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63) The Principal-Agent Problem arises:A) because managers have little incentive to work in the interest of shareholders when this meansworking against their own self-interest.B) because of the separation of ownership and control in a corporation.C) Both A and BD) None of the aboveAnswer: CDiff: 1Section: 1.2 Ownership Versus Control of CorporationsSkill: Conceptual4) If shareholders are unhappywith a CEO'sperformance, they are most likely to:A) buy more shares in an effort to gain control of the firm.B) file a shareholder resolution.C) replace the CEO through a grassroots shareholder uprising.D) sell their shares.Answer: DDiff: 2Section:1.2 Ownership Versus Control of CorporationsSkill: Conceptual5) A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorlyperforming firm and in doing so gets enough votes to replace the board of directorsand the CEO.A) shareholder proposalB) leveraged buyoutC) shareholder actionD) hostile takeoverAnswer: DDiff: 2Section: 1.2 Ownership Versus Control of CorporationsSkill: Definition6) Which of the following statements is FALSE?A) In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debtholders.B) Because a corporation is a separate legal entity, when it fails to repay its debts the people who lent tothe firm, the debt holders, are entitled to seizethe assets of the corporation in compensation for thedefault.C) As long as the corporation can satisfy the claims of the debt holders, ownership remains in the handsof the equity holders.D) If the corporation fails to satisfy debt holders' claims,debtholders may lose control of the firm.Answer: DExplanation: If the corporation fails to satisfy debt holders' claims, debt holders may take control of thefirm.Diff: 2Section: 1.2 Ownership Versus Control of CorporationsSkill: Conceptual

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77)The most senior financial manager in a corporation is usually called:A) the chief executive officer.B) the chief financial officer.C) the chief operating officer.D) the chairman of the board.Answer: BDiff: 1Section:1.2 Ownership Versus Control ofCorporationsSkill: Definition8) You overhear your manager saying that she plans to book an Ocean-view room on her upcoming tripto Miami for a meeting. You know that the interior rooms are much less expensive and that your manageris traveling at theCompany's expense. This use of additional funds comes about as a result of:A) an agency problem.B) an adverse selection problem.C) a moral hazard.D) a publicity problem.Answer: ADiff: 1Section: 1.2 Ownership Versus Control of CorporationsSkill:Definition9) An agency problem can be alleviated:A) when a firm is a sole proprietorship.B) by compensating managers in such a way that acting in the best interest of shareholders is also in thebest interest of managers.C) by asking managers to takeon more risk than they are comfortable taking.D) A and BAnswer: DDiff: 1Section: 1.2 Ownership Versus Control of CorporationsSkill: Definition10) Do corporate decisions that increase the value of the firm's equity benefit society as a whole?A) Yes, as long as the value of the firm's equity increases, society is better off.B) Yes, as long as the increase in the value of the firm's equity does not come at the expense of others.C)No, any gain in the value of the firm's equity is always less thanthe cost to society.D) No, any gains in the value of the firm's equity are perfectly offset by societal costs.Answer: BDiff: 1Section: 1.2 Ownership Versus Control of CorporationsSkill: Conceptual

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811) What strategies are available to shareholdersto help ensure that managers are motivated to act in theinterest of the shareholders rather than their own interest?Answer:1.The threat of a hostile takeover2.Shareholder initiatives3.Performance-based compensationDiff: 3Section: 1.2 Ownership Versus Control of CorporationsSkill: Conceptual1.3The Stock MarketUse the table for the question(s) below.Consider the following two quotes for XYZ stock:November 11thNovember18thAsk:25.25Ask:26.00Bid:25.20Bid:25.931) How muchwould you have to pay to purchase 100 shares of XYZ stock on November 18th?A) $2520B) $2525C) $2593D) $2600Answer: DExplanation: 100 shares × $26.00 (ask price) = $2600Diff: 1Section: 1.3 The Stock MarketSkill: Analytical2) How much would you receive if you sold 200 shares of XYZ stock on November 11th?A) $5050B) $5040C) $5186D) $5200Answer: BExplanation: 200 shares × $25.20 (bid price) = $5040Diff: 1Section: 1.3 The Stock MarketSkill: Analytical

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93) The largest stock market inthe world by market capitalization is:A) the London Stock Exchange.B) NASDAQ.C) the American Stock Exchange.D) the New York Stock Exchange.Answer: DDiff: 1Section: 1.3 The Stock MarketSkill: Definition4) The largest stock market in the worldby volume is:A) the London Stock Exchange.B) NASDAQ.C) the American Stock Exchange.D) the New York Stock Exchange.Answer: BDiff: 1Section: 1.3 The Stock MarketSkill:Definition5) An investment is said to be liquid if the investment:A) has large day-to-day fluctuations in price.B) has a large bid-ask spread.C) can easily be converted into cash.D) is traded on a stock exchange.Answer: CDiff: 2Section:1.3 The Stock MarketSkill: Definition6) What type of company trades on an organizedstock exchange?A) A limited liability companyB) A private companyC) An "S" corporationD) A public companyAnswer: DDiff: 1Section: 1.3 The Stock MarketSkill:Definition

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107) Which of the following statements is FALSE?A) On NASDAQ, stocks can and do have multiple market makers who compete with each other. Eachmarket maker must post bid and ask prices in the NASDAQ network where they can be viewed by allparticipants.B) Bid prices exceed ask prices.C) Because customers always buy at the ask andsell at the bid, the bid-ask spread is a transaction costinvestors have to pay in order to trade.D) Prior to 2005, market makers(known on the NYSE as specialists) matched buyers and sellers on thefloor of the NYSE.Answer: BExplanation: Ask pricesexceed bid prices.Diff: 2Section: 1.3 The Stock MarketSkill: Conceptual8) If you buy shares of Coca-Cola on the primary market:A) Coca-Cola receives the money because the company has issued new shares.B) you buy the shares from another investor who decided to sell the shares.C) you buy the shares from the New York Stock Exchange.D) you buy the shares from the Federal Reserve.Answer:ADiff: 1Section: 1.3 The Stock MarketSkill: Definition9) If you buy shares of Coca-Cola on the secondary market:A) Coca-Cola receives the money because the company has issued new shares.B) you buy the shares from another investor who decided to sell the shares.C) you buy the shares from the New York Stock Exchange.D) you buy the shares from the Federal Reserve.Answer: BDiff: 1Section: 1.3 The Stock MarketSkill: Definition

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11Use the table for the question(s) below.Consider the following two quotes for XYZ stock:November 11thNovember 18thAsk:25.25Ask:26.00Bid:25.20Bid:25.9310)What are your net proceeds if you purchased 2500 shares of XYZ stock on November 11th and thensold them a week later on November 18th?Answer: buy at ask price 11/11 = 2500 × $25.25 = $63,125sell at bid price 11/18 = 2500 × $25.93 = $64,825now subtractthe price paid for the sharesso net proceeds = $64,825-$63,125 = $1700Diff: 2Section: 1.3 The Stock MarketSkill: Analytical11) Explain the main differences between the NYSE and NASDAQ stock markets.Answer: Key points:NYSE has physical location–NASDAQ is an electronic market.NYSE has one specialist in each stock whose role is to match buyers and sellers.NASDAQ has multiple market makers (dealers) in each stock who stand ready to trade on their ownaccounts.Diff: 2Section:1.3 The Stock MarketSkill: Conceptual

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1Corporate Finance, 5e(Berk/DeMarzo)Chapter 2Introduction to Financial Statement Analysis2.1Firms' Disclosure of Financial Information1)U.S. public companies are required to file their annual financial statements with the U.S. Securities andExchange Commission on which form?A) 10-AB) 10-KC) 10-QD) 10-SECAnswer: BDiff: 1Section: 2.1 Firms' Disclosure of Financial InformationSkill: Definition2) Which of the following is NOT a financial statement that every public company is requiredto produce?A) Income StatementB) Statement of Sources and Uses of CashC) Balance SheetD) Statement of Stockholders' EquityAnswer: BDiff: 2Section: 2.1 Firms' Disclosure of Financial InformationSkill: Conceptual3) The third party who checks annual financial statements to ensure that they are prepared according toGAAP and verifies that the information reported is reliable is the:A) NYSE Enforcement Board.B) Accounting Standards Board.C) Securities and Exchange Commission (SEC).D) auditor.Answer: DDiff: 1Section: 2.1 Firms' Disclosure of Financial InformationSkill: Definition4)What is the role of an auditor in financial statement analysis?Answer: Key points:1.To ensure that the annual financial statements are prepared accurately.2.To ensure that the annual financial statements are prepared according to GAAP.3.To verify that the information used in preparing the annual financial statements is reliable.Diff: 2Section: 2.1 Firms' Disclosure of Financial InformationSkill: Conceptual

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25) What are the four financial statements that all public companies must produce?Answer:1.Balance Sheet2.Income Statement3.Statement of Cash Flows4.Statement of Stockholder's EquityDiff: 2Section: 2.1 Firms' Disclosure of FinancialInformationSkill: Conceptual2.2The Balance Sheet1) Which of the following balance sheet equations is INCORRECT?A) Assets-Liabilities = Shareholders' EquityB) Assets = Liabilities + Shareholders' EquityC) Assets-Current Liabilities = Long Term LiabilitiesD) Assets-Current Liabilities = Long Term Liabilities + Shareholders' EquityAnswer: CDiff: 2Section: 2.2 The Balance SheetSkill: Conceptual2) Cash is a:A) long-term asset.B) current asset.C) current liability.D) long-term liability.Answer: BDiff: 1Section: 2.2 The Balance SheetSkill: Definition3) Accounts payable is a:A) long-term liability.B) current asset.C) long-term asset.D) current liability.Answer: DDiff: 1Section: 2.2 The Balance SheetSkill: Definition

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34) A 30-year mortgage loan is a:A) long-term liability.B)current liability.C) current asset.D) long-term asset.Answer: ADiff: 1Section: 2.2 The Balance SheetSkill: Definition5) Which of the following statements regarding the balance sheetis INCORRECT?A) The balance sheet provides a snapshot of the firm's financial position at a given point in time.B) The balance sheet lists the firm's assets and liabilities.C) The balance sheet reports stockholders' equity on the right-hand side.D) The balance sheet reports liabilities on the left-hand side.Answer: DDiff: 2Section: 2.2 The Balance SheetSkill: Conceptual6) Dustin's Donuts experienced a decrease in the value of the trademark of a company it acquired twoyears ago. This reductionin value results in:A) an impairment charge.B) depreciation expense.C) an operating expense.D) goodwill.Answer: ADiff: 1Section: 2.2 The Balance SheetSkill: Definition7) Which of the following is an example of an intangible asset?A) Brand names and trademarksB) PatentsC)Customer relationshipsD) All of the above are intangible assets.Answer: DDiff: 1Section: 2.2 The Balance SheetSkill: Definition8) On the balance sheet, short-term debt appears:A) in the Stockholders' Equity section.B) in the Operating Expensessection.C) in the Current Assets section.D) in the Current Liabilities section.Answer: DDiff: 1Section: 2.2 The Balance SheetSkill: Definition

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