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SOLUTION MANUAL
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Introduction to Corporate Finance

Booth; Cleary; Rakita
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5th Canadian Edition
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Introduction to Corporate Finance 5th Canadian Edition Test Bank
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Chapter 1: An Introduction to Finance

Multiple Choice Questions
1. Section: 1.1 Finance Defined
Learning Objective: 1.1
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Level of difficulty: Basic
CPA: Finance
Solution: A
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2. Section: 1.2 Real versus Financial Assets
Learning Objective: 1.2
Level of difficulty: Intermediate
CPA: Finance
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Solution: C
Stocks are financial assets. Examples of real assets are residential structures, non-residential
structures, machinery and equipment, durables, inventories, and land.
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3. Section: 1.2 Real versus Financial Assets
Learning Objective: 1.2
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Level of difficulty: Basic
CPA: Finance
Solution: D
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4. Section: 1.2 Real Versus Financial Assets
Learning Objective 1.2
Level of difficulty: Basic
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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.
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5. Section: 1.3 The Financial System
Learning Objective: 1.3
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Level of difficulty: Basic
CPA: Finance
Solution: B
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6. Section: 1.3 The Financial System
Learning Objective: 1.3
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Level of difficulty: Intermediate
CPA: Finance

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Solution: A
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In the financial system, households are the primary fund providers to government and
businesses.
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7. Section: 1.3 The Financial System
Learning Objective: 1.3
Level of difficulty: Intermediate
CPA: Finance
Solution: C
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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.
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8. Section: 1.4 Financial Instruments and Markets
Learning Objective: 1.4
Level of difficulty: Intermediate
CPA: Finance
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Solution: C

9. Section: 1.4 Financial Instruments and Markets
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Learning Objective: 1.4
Level of difficulty: Intermediate
CPA: Finance
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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.
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10. Section 1.5 The Global Financial Community
Learning Objective: 1.5
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Level of difficulty: Intermediate
CPA: Finance
Solution: C
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Practice Problems
Intermediate
11. Section: 1.2 Real versus Financial Assets
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Learning Objective: 1.2
Level of difficulty: Intermediate
CPA: Finance
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Solution:
Balance sheet:
Residential structures: $1,000 + $3,000 + $1,500 = $5,500
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As there are no foreign assets or liabilities, the net worth or equity of the island is $5,500