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The financial crisis that began in 2008 was caused by a speculative bubble in home prices amidst far too much debt. As home prices fell, the excessive debt of families, banks, and other financial institu- tions became obvious. People spent less, and corporations cut costs by laying off workers and rap- idly slowing the inventory flowing in global supply chains. Home builders built far fewer homes and tried to quickly reduce debt. Banks made fewer loans, and credit became very difficult to obtain. As the losses mounted, stock markets fell harply. By the end of 2008, many governments around world reacted to prevent another Great Depression similar to the one that occurred in the 1930s To keep the economic systems working, the U.S. government spent several tillion dollars to support failing financial institutions and banks, extend unemployment benefits, increase employment. and support the sales of cars and homes. When it appeared that Countrywide Financial (home loans) and Merrill Lynch (investments) were in serious trouble, the U.S. government helped broker deals i which Bank of America took over both firms with the help of government loans and guarantces. To demonstrate the effect of the recent financial crisis, we will use a small custom home builder called Horizon Homes, which used Bank of America. 1. Find the gross profit for each year by multiplying gross sales by the profit margin. Year Gross Sales Profit Margin Profit or Loss 2007 $92.080,000 2008 $64,160,000 2009 $28,034,000 2010 $24,000,000 2011 $32,060,000 4.6% -12.3% -30.5% 2.0% 1.6% - Financial crisis begins Firm struggles to survive - 2. In 1996, managers at Horizon Homes had anticipated eventual financial problems and they 2. invested $2,500,000 earning 6% per year (ignore taxes). Find the future value of this investment in 2008 when the firm had its first big loss. Was the value of the investment enough to offset the 2008 loss? 3. (a) Find the combined loss by adding the losses in 2008 and 2009. (b) Find the present value that needed to be set aside in 1996 assuming 6% compounded annually to offset the total losses for 2008 and 2009. Hint: For simplicity, assume that the total of the two years losses occurred in 2009. 4. Businesses incur risk, the possibility that bad things happen without warning. For a company may be adversely affected by a competitor that brings a better product t market. Discuss what managers can do to better prepare for risk

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