Multiple Choice Questions

Solutions Manual 1 Chapter 1 Copyright © 2020 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.

Chapter 1: An Introduction to Finance

Multiple Choice Questions

1. Section: 1.1 Finance Defined

Learning Objective: 1.1

Level of difficulty: Basic

CPA: Finance

Solution: A

2. Section: 1.2 Real versus Financial Assets

Learning Objective: 1.2

Level of difficulty: Intermediate

CPA: Finance

Solution: C

Stocks are financial assets. Examples of real assets are residential structures, non-residential structures, machinery and equipment, durables, inventories, and land.

3. Section: 1.2 Real versus Financial Assets

Learning Objective: 1.2

Level of difficulty: Basic

CPA: Finance

Solution: D

4. Section: 1.2 Real Versus Financial Assets

Learning Objective 1.2

Level of difficulty: Basic

CPA: Finance

Solution:

Liquidity is typically characterized as the ability to change an asset into cash quickly. Many financial assets, for example investments such as stocks and bonds, trade on public financial markets, and their monetary value can be readily realized. In contrast, the process of converting a real asset, such as real estate, into cash is considered to be much more time consuming.

5. Section: 1.3 The Financial System

Learning Objective: 1.3

Level of difficulty: Basic

CPA: Finance

Solution: B

6. Section: 1.3 The Financial System

Learning Objective: 1.3

Level of difficulty: Intermediate

CPA: Finance

Solution: A

(Introduction to Corporate Finance, 5th Canadian Edition, 5e Laurence Booth, Sean Cleary, Ian Rakita) (Solution Manual, For Complete File, Download link at the end of this File) 1 / 4

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Introduction to Corporate Finance, Fifth Edition Booth, Cleary, Rakita Solutions Manual 2 Chapter 1 Copyright © 2020 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.In the financial system, households are the primary fund providers to government and businesses.

7. Section: 1.3 The Financial System

Learning Objective: 1.3

Level of difficulty: Intermediate

CPA: Finance

Solution: C

Banks, pension funds, and insurance firms transform the nature of the underlying financial securities. However, mutual funds do not transform the nature of the underlying financial securities.

8. Section: 1.4 Financial Instruments and Markets

Learning Objective: 1.4

Level of difficulty: Intermediate

CPA: Finance

Solution: C

9. Section: 1.4 Financial Instruments and Markets

Learning Objective: 1.4

Level of difficulty: Intermediate

CPA: Finance

Solution:

A marketable asset is one that can be traded between or among investors after issuance, but before expiry. The asset’s market value will also change over time while the asset is outstanding. In contrast, non-marketable assets cannot be traded between or among investors.

• Section 1.5 The Global Financial Community

Learning Objective: 1.5

Level of difficulty: Intermediate

CPA: Finance

Solution: C

Practice Problems Intermediate

11. Section: 1.2 Real versus Financial Assets

Learning Objective: 1.2

Level of difficulty: Intermediate

CPA: Finance

Solution:

Balance sheet:

Residential structures: $1,000 + $3,000 + $1,500 = $5,500

As there are no foreign assets or liabilities, the net worth or equity of the island is $5,500 3 / 4

Introduction to Corporate Finance, Fifth Edition Booth, Cleary, Rakita Solutions Manual 3 Chapter 1 Copyright © 2020 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.

This shows all of the assets and liabilities:

Assets Liabilities Fred House $1,000 Debt to Friday $ 500 Robinson House 3,000 Debt to Friday 2,000 Friday House 1,500 Loan to Fred 500 Loan to Robinson 2,000 Totals $8,000 $2,500

The net worth of the economy equals total assets minus total liabilities, or $5,500.

12. Section: 1.2 The Financial System

Learning Objective: 1.3

Level of difficulty: Intermediate

CPA: Finance

Solution:

In the financial system, there are four major sectors: households, government, business, and non- residents. Within the field of finance, there are four major areas: personal finance, government finance, corporate finance, and international finance. They closely interrelate to each other.Because they are all major parts of the whole financial system, what happens in one market will affect all the other markets.

13. Section: 1.3 The Financial System

Learning Objective: 1.3

Level of difficulty: Intermediate

CPA: Finance

Solution:

Banks take in deposits and loan them out to fund borrowers. Pension funds take in pension contributions and pay out pensions to plan participants when they retire. Insurance firms take in premiums and pay out when a certain event occurs. Mutual funds pool small funds together and make large investments that small investors cannot make. Mutual funds also offer investment expertise to ordinary investors.

14. Section: 1.3 The Financial System

Learning Objective: 1.3

Level of difficulty: Intermediate

CPA: Finance

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