Fin 320| 53 Final End Of Year Questions Well Answered|2024
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Course
Fin 320
Institution
Fin 320
CH 1
Difference between asset allocation and security selection - ️️Asset allocation is the allocation of an investment portfolio across broad asset classes.
Security selection is the choice of specific securities within each asset class
CH 1
For each transaction, identify the real and/or ...
Fin 320 53 Final End Of Year Questions
Well Answered
CH 1
Difference between asset allocation and security selection - ✔ ✔ Asset allocation is the allocation of
an investment portfolio across broad asset classes.
Security selection is the choice of specific securities within each asset class
CH 1
For each transaction, identify the real and/or financial assets that trade hands. Are any financial assets
created or destroyed in the transaction?
a. Toyota takes out a bank loan to finance the construction of a new factory.
b. Toyota pays off its loan.
c. Toyota uses $10 million of cash on hand to purchase additional inventory of spare auto parts. - ✔ ✔
a. Toyota creates a real asset—the factory. The loan is a financial asset that is created in the
transaction.
b. When the loan is repaid, the financial asset is destroyed but the real asset continues to exist.
c. The cash is a financial asset that is traded in exchange for a real asset, inventory.
CH 1
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? (LO 1-2)
, a. Lanni takes out a bank loan. It receives $50,000 in cash and signs a note promising to pay back the
loan over three years.
b. Lanni uses the cash from the bank plus $20,000 of its own funds to finance the development
of new financial planning software.
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 5,000 shares of
Microsoft stock.
d. Lanni sells the shares of stock for $25 per share and uses part of the proceeds to pay off the bank
loan. - ✔ ✔ 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
held by the bank.
b. The cash paid by Lanni is the transfer of a financial asset to the software developer. In return, Lanni
gets a real asset, the completed software. No financial assets are created or destroyed. Cash is simply
transferred from one firm to another.
c. Lanni sells the software, which is a real asset, to Microsoft. In exchange Lanni receives a financial
asset, 5,000 shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, this would
constitute the creation of new financial asset.
d. In selling 5,000 shares of stock for $125,000, Lanni is exchanging one financial asset for another. In
paying off the IOU with $50,000, Lanni is exchanging financial assets. The loan is "destroyed" in the
transaction, since it is retired when paid.
CH 1
Suppose that in a wave of pessimism, housing prices fall by 10% across the entire
economy. (LO 1-2)
a. Has the stock of real assets of the economy changed?
b. Are individuals less wealthy?
c. Can you reconcile your answers to ( a ) and ( b )? - ✔ ✔ a. No. The real estate in existence has not
changed, only the perception of its value has.
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