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.. ifficult, thereby increasing the cost of capital. A higher cost of capital results in less investment and lower real growth.
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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, shares that can be traded in the secondary market are more attractive to initial investors since they know that 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.
a. No. The increase in price did not add to the productive capacity of the economy.
Yes, the value of the equity held in these assets has increased.
Future homeowners as a whole are worse off, since mortgage liabilities have also increased. In addition, this housing price bubble will eventually burst and society as a whole <and most likely taxpayers> will endure the damage.
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>.
Lanni transfers financial assets <cash> to the software developers. In return, Lanni gets a real asset, th