Investments 9th Edition by Zvi Bodie Solution manual

 
 

8.         a.

Assets			Liabilities & Shareholders’ equity
Cash	$ 70,000		Bank loan	$ 50,000
Computers	30,000		Shareholders’ equity	50,000
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’ equity	50,000
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’ equity	100,000
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.