BOOK SOULUTION 6E - CHAPTER 1: THE INVESTMENT ENVIRONMENT...

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CHAPTER 1: THE INVESTMENT ENVIRONMENT 1. a.Cash is a financial asset because it is the liability of the federal government. b. No. The cash does not directly add to the productive capacity of the economy. c.Yes. d. If the economy is already operating at full capacity, and you now command the additional purchasing power provided by the $10 billion, then your increased ability to purchase goods must be offset by a decrease in the ability of others to purchase goods. Thus, the other individuals in the economy can be made worse off by your discovery. 2. a.The bank loan is a financial liability for Lanni. (Lanni’s IOU is the bank’s financial asset). The cash Lanni receives is a financial asset. The new financial asset created is Lanni's promissory note (that is, Lanni’s IOU to the bank). b. Lanni transfers financial assets (cash) to the software developers. In return, Lanni gets a real asset, the completed software. No financial assets are created or destroyed; cash is simply transferred from one party to another. c.Lanni gives the real asset (the software) to Microsoft in exchange for a financial asset, 1,500 shares of stock in Microsoft. If Microsoft issues new shares in order to pay Lanni, then this would represent the creation of new financial assets. d. Lanni exchanges one financial asset (1,500 shares of stock) for another ($120,000). Lanni gives a financial asset ($50,000 cash) to the bank and gets back another financial asset (its IOU). The loan is “destroyed” in the transaction, since it is retired when paid off and no longer exists. 3. a. Assets Liabilities & Shareholders’ equity Cash $ 70,000 Bank loan $ 50,000 Computers 30,000 Shareholders’ equity 50,000 Total $100,000 Total $100,000 Ratio of real to total assets = $30,000/$100,000 = 0.30 1-1
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b. Assets Liabilities & Shareholders’ equity Software product* $ 70,000 Bank loan $ 50,000 Computers 30,000 Shareholders’ equity 50,000 Total $100,000 Total $100,000 *Valued at cost Ratio of real to total assets = $100,000/$100,000 = 1.0 c. Assets Liabilities & Shareholders’ equity Microsoft shares $120,000 Bank loan $ 50,000 Computers 30,000 Shareholders’ equity 100,000 Total $150,000 Total $150,000 Ratio of real to total assets = $30,000/$150,000 = 0.20 Conclusion: when the firm starts up and raises working capital, it will be
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This note was uploaded on 03/10/2011 for the course FMIS 3601 taught by Professor Vizanko during the Spring '08 term at University of Minnesota Duluth.

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BOOK SOULUTION 6E - CHAPTER 1: THE INVESTMENT ENVIRONMENT...

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