BKM solution Corporate Finance Back Questions

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. (Lannis IOU is the banks financial asset). The cash Lanni receives is a financial asset. The new financial asset created is Lannis promissory note (that is, Lannis 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. AssetsLiabilities Shareholders equityCash 70,000Bank loan 50,000Computers30,000Shareholders equity50,000 Total100,000 Total100,000 Ratio of real to total assets 30,000/100,000 0.30 b. AssetsLiabilities Shareholders equitySoftware product 70,000Bank loan 50,000Computers30,000Shareholders equity50,000 Total100,000 Total100,000 Valued at cost Ratio of real to total assets 100,000/100,000 1.0 c. AssetsLiabilities Shareholders equityMicrosoft