Yes you are right, the MS-DOS computer in this scenario is at the receiving end.You must be writing of what is happening at the receive side, because the /B (i.e. binary mode) on the sending side is not meant to stop at a ^Z byte.
( E.g. /B is used to concatenate binary files: COPY SOURCE_1.BIN /B + SOURCE_2.BIN /B JOINED.BIN /B )