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SOLUTION MANUALFOR INVESTMENTS BY BODIE KANE MARCUS MOHANTY
Solution Manual
For Investments, 13th Edition By Bodie, Kane &
Marcus | Full Instructor All Chapters 1-28 A+
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
SOLUTION MANUALFOR INVESTMENTS BY BODIE KANE MARCUS MOHANTY
chapter 1: the investment environment
problem sets
1. ultimately, it is true that real assets determine the material well being of
an economy. nevertheless, individuals can benefit when financial
engineering creates new products that allow them to manage their
portfolios of financial assets more efficiently. because bundling and
unbundling creates financial products with new properties and
sensitivities to various sources of risk, it allows investors to hedge
particular sources of risk more efficiently.
2. securitization requires access to a large number of potential investors. to
attract these investors, the capital market needs:
(1) a safe system of business laws and low probability of
confiscatory taxation/regulation;
(2) a well-developed investment banking industry;
(3) a well-developed system of brokerage and financial transactions, and;
(4) well-developed media, particularly financial reporting.
these characteristics are found in (indeed make for) a well-developed financial
market.
3. securitization leads to disintermediation; that is, securitization provides
a means for market participants to bypass intermediaries. for example,
mortgage-backed securities channel funds to the housing market without
requiring that banks or thrift institutions make loans from their own
portfolios. as securitization progresses, financial intermediaries must
increase other activities such as providing short-term liquidity to
consumers and small business, and financial services.
4. financial assets make it easy for large firms to raise the capital needed to
finance their investments in real assets. if general motors, for example,
could not issue stocks or bonds to the general public, it would have a far
more difficult time raising capital. contraction of the supply of financial
assets would make financing more difficult, thereby increasing the cost of
capital. a higher cost of capital results in less investment and lower real
growth.
1-2
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SOLUTION MANUALFOR INVESTMENTS BY BODIE KANE MARCUS MOHANTY
5. even if the firm does not need to issue stock in any particular year, the stock
market is still important to the financial manager. the stock price provides
important information about how the market values the firm's investment
projects. for example, if the stock price rises considerably, managers might
conclude that the market believes the firm's future prospects are bright. this
might be a useful signal to the firm to proceed with an investment such as an
expansion of the firm's business.
in addition, the fact that shares can be traded in the secondary market makes
the shares more attractive to investors since investors know that, when they
wish to, they will be able to sell their shares. this in turn makes investors
more willing to buy shares in a primary offering, and thus improves the terms
on which firms can raise money in the equity market.
6. 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. society as a whole is worse off, since taxpayers, as a group will
make up for the liability.
7. 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 microsoft stock. 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.
1-3
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SOLUTION MANUALFOR INVESTMENTS BY BODIE KANE MARCUS MOHANTY
8. a
. liabilities &
Assets
shareholders‟ equity
cash $ 70,000 bank loan $ 50,000
computers 30,000 shareholders‟ 50,000
equity
total $100,000 total $100,000
ratio of real assets to total assets = $30,000/$100,000 = 0.30
b.
Assets liabilities &
shareholders‟ equity
software product* $ 70,000 bank loan $ 50,000
computers 30,000 shareholders‟ 50,000
equity
total $100,000 total $100,000
*valued at cost
ratio of real assets 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‟ 100,000
equity
total $150,000 total $150,000
ratio of real assets to total assets = $30,000/$150,000 = 0.20
conclusion: when the firm starts up and raises working capital, it is
characterized by a low ratio of real assets to total assets. when it is in
full production, it has a high ratio of real assets to total assets. when
the project "shuts down" and the firm sells it off for cash, financial
assets once again replace real assets.
9. for commercial banks, the ratio is:
$107.5/$10,410.9 = 0.010 for non-financial firms, the
ratio is: $13,295/$25,164 = 0.528
the difference should be expected primarily because the bulk of the
business of financial institutions is to make loans; which are financial
assets for financial institutions.
10. a. primary-market transaction
b. derivative assets
1-4
SOLUTION MANUALFOR INVESTMENTS BY BODIE KANE MARCUS MOHANTY
Solution Manual
For Investments, 13th Edition By Bodie, Kane &
Marcus | Full Instructor All Chapters 1-28 A+
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
SOLUTION MANUALFOR INVESTMENTS BY BODIE KANE MARCUS MOHANTY
chapter 1: the investment environment
problem sets
1. ultimately, it is true that real assets determine the material well being of
an economy. nevertheless, individuals can benefit when financial
engineering creates new products that allow them to manage their
portfolios of financial assets more efficiently. because bundling and
unbundling creates financial products with new properties and
sensitivities to various sources of risk, it allows investors to hedge
particular sources of risk more efficiently.
2. securitization requires access to a large number of potential investors. to
attract these investors, the capital market needs:
(1) a safe system of business laws and low probability of
confiscatory taxation/regulation;
(2) a well-developed investment banking industry;
(3) a well-developed system of brokerage and financial transactions, and;
(4) well-developed media, particularly financial reporting.
these characteristics are found in (indeed make for) a well-developed financial
market.
3. securitization leads to disintermediation; that is, securitization provides
a means for market participants to bypass intermediaries. for example,
mortgage-backed securities channel funds to the housing market without
requiring that banks or thrift institutions make loans from their own
portfolios. as securitization progresses, financial intermediaries must
increase other activities such as providing short-term liquidity to
consumers and small business, and financial services.
4. financial assets make it easy for large firms to raise the capital needed to
finance their investments in real assets. if general motors, for example,
could not issue stocks or bonds to the general public, it would have a far
more difficult time raising capital. contraction of the supply of financial
assets would make financing more difficult, thereby increasing the cost of
capital. a higher cost of capital results in less investment and lower real
growth.
1-2
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
SOLUTION MANUALFOR INVESTMENTS BY BODIE KANE MARCUS MOHANTY
5. even if the firm does not need to issue stock in any particular year, the stock
market is still important to the financial manager. the stock price provides
important information about how the market values the firm's investment
projects. for example, if the stock price rises considerably, managers might
conclude that the market believes the firm's future prospects are bright. this
might be a useful signal to the firm to proceed with an investment such as an
expansion of the firm's business.
in addition, the fact that shares can be traded in the secondary market makes
the shares more attractive to investors since investors know that, when they
wish to, they will be able to sell their shares. this in turn makes investors
more willing to buy shares in a primary offering, and thus improves the terms
on which firms can raise money in the equity market.
6. 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. society as a whole is worse off, since taxpayers, as a group will
make up for the liability.
7. 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 microsoft stock. 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.
1-3
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
SOLUTION MANUALFOR INVESTMENTS BY BODIE KANE MARCUS MOHANTY
8. a
. liabilities &
Assets
shareholders‟ equity
cash $ 70,000 bank loan $ 50,000
computers 30,000 shareholders‟ 50,000
equity
total $100,000 total $100,000
ratio of real assets to total assets = $30,000/$100,000 = 0.30
b.
Assets liabilities &
shareholders‟ equity
software product* $ 70,000 bank loan $ 50,000
computers 30,000 shareholders‟ 50,000
equity
total $100,000 total $100,000
*valued at cost
ratio of real assets 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‟ 100,000
equity
total $150,000 total $150,000
ratio of real assets to total assets = $30,000/$150,000 = 0.20
conclusion: when the firm starts up and raises working capital, it is
characterized by a low ratio of real assets to total assets. when it is in
full production, it has a high ratio of real assets to total assets. when
the project "shuts down" and the firm sells it off for cash, financial
assets once again replace real assets.
9. for commercial banks, the ratio is:
$107.5/$10,410.9 = 0.010 for non-financial firms, the
ratio is: $13,295/$25,164 = 0.528
the difference should be expected primarily because the bulk of the
business of financial institutions is to make loans; which are financial
assets for financial institutions.
10. a. primary-market transaction
b. derivative assets
1-4
