Topics: Financial markets, Stock market, Investment Pages: 15 (5751 words) Published: April 14, 2015
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G4076 Final Exam

Distributed: November 21, 2014;
Due: December 5, 2014.

Instructor: Alexei Chekhlov

Each question is not difficult, of intermediate or below difficulty level, but there are a total of 44 questions. When you are asked to write something “in detail”, it is understood that you need to write more than one sentence answer, but try not to write more than ten sentences. Please, allocate enough time to complete the exam on time. When submitting your Final Exam, please, make sure it has your name and e-mail prefix on it.

This exam is take-home, open-book, which means that you are allowed to use the BKM textbook and all the materials that are uploaded into the CourseWorks folders. However, if there are reasons to believe that in the class we have either copying between two or more students or copying by a student from an outside non-authorized source, as there none were authorized other than the above, there will be appropriate consequences. Here are some of the Columbia University graduate school policies for your reference: If you believe that these policies are violated, please, let the Instructor know.

Chapter 1

1.6. Suppose that the housing prices across the world double. a. Has society become richer?
No. Although houses are worth more in terms of value now, the overall production volume of the economy has not increased as a result. b. Are homeowners wealthier?
Yes. A house is an asset to the homeowner. If housing prices doubled, the equity value held in these assets increased. There is an increased value in these assets and homeowners are now wealthier. c. Please, reconcile your answers to a. and b. Is anyone worse off as a result of such change? Yes. The people that are worse off as a result of such change are the potential homeowners that are looking to buy a home now. This is because the increase in mortgage liabilities will force the future homeowners to take on more debt. Also, large increases in housing prices are usually followed by a bubble burst where housing prices begin dropping dramatically. This will result in many mortgage defaults, which will damage society and the economy as a whole.

1.7. Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $30,000 and has cash on hand of $20,000 contributed by Lanni’s owners. For each of the following transactions, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction? a. Lanni takes out a bank loan. It receives $50,000 in cash and signs a note promising to pay back the loan over 3 years.

The $50,000 in cash that Lanni receives from the bank is a financial asset. However, the bank loan is a financial liability for Lanni. This promissory note from the bank loan is a new financial asset for the bank created in the transaction.

b. Lanni uses the cash from the bank plus $20,000 of its own funds to finance the development of new financial planning software.

The cash that Lanni uses to finance the software development is a financial asset. The complete, developed software is the real asset that Lanni gets in return. There are no financial assets that are created or destroyed in the transaction because there is only a cash transfer.

c. Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 1,500 shares of Microsoft stock.

The software product that Lanni sells to Microsoft is a real asset. The 1,500 shares of Microsoft stock that Lanni gets in return is a financial asset. There is a creation of financial assets if Microsoft issues new shares to pay Lanni, which would dilute current shareholder value.

d. Lanni sells the shares of stock...
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