Introduction to Corporate Finance, Fifth
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Booth, Cleary, Rakita
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Edition
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Chapter 1: An Introduction to Finance
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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
,Introduction to Corporate Finance, Fifth
#r #r #r #r
Booth, Cleary, Rakita
#r #r
Edition
#r
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, Fifth #r #r #r #r
Booth, Cleary, Rakita #r #r
Edition
#r
In the financial system, households are the primary fund providers to government and
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businesses.
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7. Section: 1.3 The Financial System #r #r #r #r
Learning Objective: 1.3 #r #r
Level of difficulty: Intermediate
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CPA: Finance #r
Solution: C #r
Banks, pension funds, and insurance firms transform the nature of the underlying financial
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securities. However, mutual funds do not transform the nature of the underlying financial
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securities.
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8. Section: 1.4 Financial Instruments and Markets #r #r #r #r #r
Learning Objective: 1.4
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Level of difficulty: Intermediate
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CPA: Finance #r
Solution: C #r
9. Section: 1.4 Financial Instruments and Markets #r #r #r #r #r
Learning Objective: 1.4
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Level of difficulty: Intermediate
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CPA: Finance
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Solution:
A marketable asset is one that can be traded between or among investors after issuance, but
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before expiry. The asset‘s market value will also change over time while the asset is
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outstanding. In contrast, non-marketable assets cannot be traded between or among investors.
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10. Section 1.5 The Global Financial Community #r #r #r #r #r
Learning Objective: 1.5
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Level of difficulty: Intermediate
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CPA: Finance #r
Solution: C #r
Practice Problems #r
Intermediate
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11. Section: 1.2 Real versus Financial Assets #r #r #r #r #r
Learning Objective: 1.2
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Level of difficulty: Intermediate
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CPA: Finance #r
Solution:
Balance sheet: #r
Residential structures: $1,000 + $3,000 + $1,500 = $5,500#r #r #r #r #r #r #r #r
As there are no foreign assets or liabilities, the net worth or equity of the island is $5,500
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, Introduction to Corporate Finance, Fifth #r #r #r #r
Booth, Cleary, Rakita#r #r
Edition
#r
This shows all of the assets and liabilities:
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Assets Liabilities
Fred
House $1,000
Debt to Friday #r #r
$ 500#r
Robinson
House 3,000
Debt to Friday #r #r
2,000
Friday
House 1,500
Loan to Fred #r #r
500
Loan to Robinson #r #r
2,000
Totals $8,000 $2,500
The net worth of the economy equals total assets minus total liabilities, or $5,500.
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12. Section: 1.2 The Financial System #r #r #r #r
Learning Objective: 1.3 #r #r
Level of difficulty: Intermediate
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CPA: Finance #r
Solution:
In the financial system, there are four major sectors: households, government, business, and non-
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residents. Within the field of finance, there are four major areas: personal finance, government
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finance, corporate finance, and international finance. They closely interrelate to each other.
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Because they are all major parts of the whole financial system, what happens in one market will
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affect all the other markets.
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13. Section: 1.3 The Financial System #r #r #r #r
Learning Objective: 1.3 #r #r
Level of difficulty: Intermediate
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CPA: Finance #r
Solution:
Banks take in deposits and loan them out to fund borrowers. Pension funds take in pension
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
contributions and pay out pensions to plan participants when they retire. Insurance firms take in
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
premiums and pay out when a certain event occurs. Mutual funds pool small funds together and
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
make large investments that small investors cannot make. Mutual funds also offer investment
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expertise to ordinary investors.
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14. Section: 1.3 The Financial System #r #r #r #r
Learning Objective: 1.3 #r #r
Level of difficulty: Intermediate
#r #r #r
CPA: Finance #r
#r #r #r #r
Booth, Cleary, Rakita
#r #r
Edition
#r
Chapter 1: An Introduction to Finance
#r #r #r #r #r
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
,Introduction to Corporate Finance, Fifth
#r #r #r #r
Booth, Cleary, Rakita
#r #r
Edition
#r
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, Fifth #r #r #r #r
Booth, Cleary, Rakita #r #r
Edition
#r
In the financial system, households are the primary fund providers to government and
#r #r #r #r #r #r #r #r #r #r #r #r
businesses.
#r
7. Section: 1.3 The Financial System #r #r #r #r
Learning Objective: 1.3 #r #r
Level of difficulty: Intermediate
#r #r #r
CPA: Finance #r
Solution: C #r
Banks, pension funds, and insurance firms transform the nature of the underlying financial
#r #r #r #r #r #r #r #r #r #r #r #r
securities. However, mutual funds do not transform the nature of the underlying financial
#r #r #r #r #r #r #r #r #r #r #r #r #r
securities.
#r
8. Section: 1.4 Financial Instruments and Markets #r #r #r #r #r
Learning Objective: 1.4
#r #r #r
Level of difficulty: Intermediate
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CPA: Finance #r
Solution: C #r
9. Section: 1.4 Financial Instruments and Markets #r #r #r #r #r
Learning Objective: 1.4
#r #r #r
Level of difficulty: Intermediate
#r #r #r
CPA: Finance
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Solution:
A marketable asset is one that can be traded between or among investors after issuance, but
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
before expiry. The asset‘s market value will also change over time while the asset is
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
outstanding. In contrast, non-marketable assets cannot be traded between or among investors.
#r #r #r #r #r #r #r #r #r #r #r #r
10. Section 1.5 The Global Financial Community #r #r #r #r #r
Learning Objective: 1.5
#r #r #r
Level of difficulty: Intermediate
#r #r #r
CPA: Finance #r
Solution: C #r
Practice Problems #r
Intermediate
#r
11. Section: 1.2 Real versus Financial Assets #r #r #r #r #r
Learning Objective: 1.2
#r #r #r
Level of difficulty: Intermediate
#r #r #r
CPA: Finance #r
Solution:
Balance sheet: #r
Residential structures: $1,000 + $3,000 + $1,500 = $5,500#r #r #r #r #r #r #r #r
As there are no foreign assets or liabilities, the net worth or equity of the island is $5,500
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
, Introduction to Corporate Finance, Fifth #r #r #r #r
Booth, Cleary, Rakita#r #r
Edition
#r
This shows all of the assets and liabilities:
#r #r #r #r #r #r #r
Assets Liabilities
Fred
House $1,000
Debt to Friday #r #r
$ 500#r
Robinson
House 3,000
Debt to Friday #r #r
2,000
Friday
House 1,500
Loan to Fred #r #r
500
Loan to Robinson #r #r
2,000
Totals $8,000 $2,500
The net worth of the economy equals total assets minus total liabilities, or $5,500.
#r #r #r #r #r #r #r #r #r #r #r #r #r
12. Section: 1.2 The Financial System #r #r #r #r
Learning Objective: 1.3 #r #r
Level of difficulty: Intermediate
#r #r #r
CPA: Finance #r
Solution:
In the financial system, there are four major sectors: households, government, business, and non-
#r #r #r #r #r #r #r #r #r #r #r #r #r
residents. Within the field of finance, there are four major areas: personal finance, government
#r # r #r #r #r #r #r #r #r #r #r #r #r #r
finance, corporate finance, and international finance. They closely interrelate to each other.
#r #r #r #r #r #r #r #r #r #r #r #r
Because they are all major parts of the whole financial system, what happens in one market will
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
affect all the other markets.
#r #r #r #r #r
13. Section: 1.3 The Financial System #r #r #r #r
Learning Objective: 1.3 #r #r
Level of difficulty: Intermediate
#r #r #r
CPA: Finance #r
Solution:
Banks take in deposits and loan them out to fund borrowers. Pension funds take in pension
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
contributions and pay out pensions to plan participants when they retire. Insurance firms take in
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
premiums and pay out when a certain event occurs. Mutual funds pool small funds together and
#r #r #r #r #r #r #r #r #r #r #r #r #r #r #r #r
make large investments that small investors cannot make. Mutual funds also offer investment
#r #r #r #r #r #r #r #r #r #r #r #r #r
expertise to ordinary investors.
#r #r #r #r
14. Section: 1.3 The Financial System #r #r #r #r
Learning Objective: 1.3 #r #r
Level of difficulty: Intermediate
#r #r #r
CPA: Finance #r
