CORPORATE FINANCE ASSIGNMENT # 2

1. Suppose you discover a treasure chest of $10 billion in cash.

a. Is this a real or financial asset?
b. Is society any richer for the discovery?
c. Are you wealthier?
d. Can you reconcile your answers to (b) and (c)? Is anyone worse off as a result of
the
discovery?
ANS: a) Real or Financial Asset: Since cash is used to buy a tangible asset but
does not contribute directly to the asset's value, it is known as a financial asset.
Real estate is often used to collect funds, and the income or wealth produced is
distributed among the investors.
b) Effect on society : The discovery of a treasure chest containing $10 billion in
cash does not make society richer because the money would not add to the
economy's productive potential.
c) Effect on wealth: Finding money will lead to a person becoming wealthy
because the money can directly increase their income. It will boost the income of
the person who discovers it..
d) Negative Impact on the discovery: Taxpayers are responsible for paying the
government tax on the discovered cash number, making the discover tax more
complicated for taxpayers.

2. 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 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 1,500 shares of
Microsoft stock.
d. Lanni sells the shares of stock for $80 per share, and uses part of the proceeds to
pay
off the bank loan.