Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
Chapter 1: An Introduction to Finance
Multiple Choice Questions
1. Section: 1.1 Finance Defined
2. Section: 1.2 Real versus Financial Assets
Learning objective: 1.2
3. Section: 1.3 The Financial System
4. Section: 1.3 The Financial System
Learning objective: 1.3
5. Section: 1.3 The Financial System
Learning objective: 1.3
6. Section: 1.4 Financial Instruments and Markets
7. Section 1.5 The Global Financial Community
8. Section 1.5 The Global Financial Community
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
Practice Problems
Intermediate
9. Section: 1.2 Real versus Financial Assets
Learning objective: 1.2
Level of Difficulty: Intermediate
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
To deal with Fred and Robinson’s debts:
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
10. Section: 1.3 The Financial System
Learning objective: 1.3
Level of Difficulty: Intermediate
Solution: In the financial system, there are mainly four major sectors: Households, Government,
11. Section: 1.3 The Financial System
Learning objective: 1.3
Level of Difficulty: Intermediate
Solution: Banks take in deposits and loan them out to fund borrowers. Pension funds take in
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
12. Section: 1.3 The Financial System
Learning objective: 1.3
Level of Difficulty: Intermediate
Solution: Five main reasons why financial and market intermediaries exist are:
13. Section: 1.3 The Financial System
Learning objective: 1.3
Level of Difficulty: Intermediate
Solution: A “credit crunch” refers to a situation when financial intermediaries such as banks and
14. Section: 1.4 Financial Instruments and Markets
Learning objective: 1.4
Level of Difficulty: Intermediate
Solution: There are two major types of secondary markets are exchanges or auction markets and
Challenging
15. Section: 1.4 Financial Instruments and Markets
Learning objective: 1.4
Level of Difficulty: Challenging
Solution: Secondary market transactions are those where ownership of existing shares changes
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
Answers to Concept Review Questions
1.2 Real versus Financial Assets
Concept review questions
1. What is finance?
2. Distinguish between real and financial assets.
Real assets represent the normal tangible things that we think of in terms of personal and
3. Which sector or sectors of the economy are net providers of financing and which are the net
users of financing?
1.3The Financial System
Concept review questions
1. Identify and briefly describe the three main channels of savings.
In the first channel we have direct intermediation, where the lender provides money directly to
2. Distinguish between market and financial intermediaries.
A market intermediary is simply an entity that facilitates the working of markets and helps
3. Discuss how the three most important types of financial intermediaries operate.
1.4 Financial Instruments and Markets
Concept review questions
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
2. Identify the major sources of financing used by: (a) governments and (b) businesses.
Governments raise new financing via the debt markets. They issue T-bills as a source of short-
term financing (i.e., less than one year), and they issue traditional bonds and Canada Savings
3. Distinguish between primary and secondary markets.
1.5 The Global Financial Community
Concept review questions
1. Explain why global financial markets are so important to Canadians.
2. Identify and briefly describe the two major stock markets in the United States.
3. Explain briefly why events in the United States affected countries around the world so
drastically.
The world’s money markets and bond markets are very global in nature, with U.S. markets