Reference no: EM133116319

Provide full calculations and explanations for all questions. Please do not use excel to answer.

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?

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 $15,000 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 Microsoft's 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.

2. A U.S. Treasury bill with a $1,000 face value and 90-day maturity sells at a bank discount yield of 3 percent.

A) What is the price of the bill?

B) What is the 90-day holding period return of the bill?

C) What is the bond equivalent yield of the bill?

D) What is the effective annual yield of the bill?

3. Old Economy traders opened an account to short sell 1,000 shares of internet Dreams from the previous problem. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share.

A) What is the remaining margin in the account?

B) If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

C) What is the rate of return on the investment?