www.bankofamerica.com Facts: . 1904: Founded by son of Italian immigrants * 1930s: Survived the Great Depression . 2008: Acquired Countrywide Financial (home loans) * 20Uy: Acquired Merrill Lynch (investments) The financial crisis that begin in 2008 was caused by a speculative bubble in home prices anidst far to much debt, As homeprices fell, the excessive debt of families, hunks, and other financial institutions became obvious People spent less and tried to save or simply survive for those who had lost their jobs and homes. Corporations cut costs by laying off workers and rapidly sloving 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 sharply, By the end of 2008, many governments around the world reacted to prevent another Great Depression similar to the one that occurred in the 1930s. To keep the coonomic systems working, the U.S. government has spent several trillion dal lars 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. gov- ernment helped broker deals in which Bank of America took over both finns with the help of government loans and guarantees. However, Bank of America repaid the $45 billion in debt to the government at the end of 2009. To demonstrate the effect of the recent financial crisis, we will use a small custom home builder called Horizon Hones 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 $92,080,00) 4.6% 2008 $64.160.00) -12.3%% Financial crisis begins 2009 $28.034.001 -30.5 70 Firm struggles to survive 2010 $24.000.00) 2.0% 2011 $32,060,003 1.6% 2. In 1996, managers at Horizon Homes had anticipated eventual financial problems and 2. they 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 los. Was the value of the investment enough to offset the 2108 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 of set the total losses for 2008 and 2009. Hint: For simplicity. assume that the total of the two years losses occurred in 2019. 4. Businesses incur risk the possibility that bad thingshappen without warning. For example, a company may be acversely affected by a competitor that brings a better product b the market. Discuss what managers can do to better prepare for risk. Discussion Question: Do families also face risk? Explain using examples. If so. discuss what parents can do to preparefor risk