Financial Bail-Out News Quiz

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It’s been a momentous two weeks of business news, leading to the Federal Bail-Out bill being signed into law yesterday, October 3, 2008. How many of the following news quiz questions can you answer correctly?

1. How much is provided for in the Federal Bail-out bill?
a. $7 billion
b. $70 billion
c. $700 billion
d. $7 trillion

2. What department of government will have primary responsibility for administering the bailout?
a. Treasury
b. Interior
c. Federal Reserve
d. Homeland Security

3. What did the stock market (i.e., Dow Jones index) do the day that the bailout bill was signed into law?
a. Up 778 points
b. Down 778 points
c. Up 157 points
d. Down 157 points

4. What unfavorable economic news was reported the same day as the bail-out bill was signed into law?
a. Record U.S. trade deficit
b. Oil prices back up to $120/bbl
c. Very unfavorable jobs report
d. U.S. economy officially in recession

5. Which financial institution was not offered a Federal bail-out in time to avert its bankruptcy?
a. Freddie Mac
b. Fannie Mae
c. Lehman Brothers
d. AIG

6. Which politician made a speech in March of this year “tracing the sub-prime crisis to lax oversight, and calling for a major overhaul of regulatory policy?”
a. George W. Bush
b. Barack Obama
c. John McCain
d. Michael Bloomberg

7. What led General Electric to sell $3 billion of convertible, 10% preferred stock to Warren Buffet?

8. What accounting provision, in conjunction with the sub-prime crisis, has led to weaker bank balance sheets?
a. Accounts receivable aging
b. Accelerated depreciation
c. Pooling of interest
d. Mark to Market

9. Which perk was not rolled into the bail-out bill that Congress eventually approved?
a. Extended mortgage forgiveness for homeowners
b. New/extended tax credits to promote reduced energy
c. Increased tax credits for real estate developers
d. Middle-class protection from alternative minimum tax


10. For each of the acquired, or to-be-acquired banks (a, b, c, d), match it to an acquiror, choosing from 1, 2, 3, or 4. (This one is tricky!)

a. Merrill Lynch
b. Washington Mutual
c. Countrywide Financial
d. Wachovia

1. Citigroup
2. Wells Fargo
3. Bank of America
4. J. P. Morgan Chase

Congratulations to Drew Keeling, of Kusnacht, Switzerland, for being the first to get back to me with correct answers to all 10 questions:

1. c
2. a
3. d
4. c
5. c
6. b
7. to strengthen its balance sheet
8. d
9. c
10. 2d, 3a, 3c, 4b

Small Business Recession Growth Strategies

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On June 19th I was interviewed by Diana Ransom, a reporter for “Smart Money” , on strategies that small business owners can use to grow their business during a recession. Here are my four suggestions:

1. Look to the internet for sales growth. According to the National Retail Foundation, internet sales grew at a 21.8% rate in 2007, while total retail sales grew by only 3.9%. With gas prices above $4.00/gallon nationwide, strong internet sales trends growth is expected to continue.

2. Consider selling your goods or services outside the United States. The dollar is very weak versus foreign currencies, which means that United States products and services have a pricing advantage versus those of many other countries. For business owners with no previous export experience who are unsure of their first steps, a good place to turn is the U.S. Commerce Department’s Gold Key Matching Service which will help by making introduction to experts and potential trading partners, quickly and affordably.

3. Grow by acquisition. For small business owners with expansion plans, acquisition can sometimes be more affordable than the cost of building new offices or facilities in new geographic locations or markets. This may be especially true during a recession, when business values are generally depressed. It is important, however, that the acquisition make strategic sense.

4. Gain market share with stellar customer service. If your business is not poised to expand through new channels, geographies, or by acquisition, you’ll have to earn your sales growth by winning away share of market from your competitors in your current market. One proven way to do this is by offering superior customer service than your competition.

The Profit Calculator

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When people ask me how they should estimate the profit margin of a planned new business, I advise seeking out those who are already in that business to see what you can learn. As an alternative, if you are thinking of opening a pizza place, a copy shop, a diner, or one of a number of other businesses, “New York” Magazine has identified the profit drivers in a recent issue. Click below and you will also find out how the New York Yankees franchise increased $200 million in value, despite a $28 million loss.

Finance Exam Questions – Can you solve ’em?

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I haven’t posted in the last three months to this blog because of a heavy teaching load at NYU School of Continuing Professional Studies, where I teach “Fundamentals of Corporate Finance.” Here are five questions from a practice exam I recently gave to my students; how many of these can you solve?

1. If a company with $3 million annual revenue decreases its accounts receivables from 45 days outstanding to 30 days outstanding how much cash is freed up?

2. An investor buys a 30-year, 10% interest bond, for $100,000. If interest rates increase to 20%, the value of this bond would change to:
a. $50,211
b. $91,667
c. $104,762
d. $176,862

3. Which of the following statements distinguishing debt versus equity is true?

a. Debt is an ownership interest, while equity is not
b. A publicly-owned firm’s equity has a fluctuating market price, not its debt
c. An all-debt firm is more likely to go bankrupt than an all-equity firm
d. Companies must have some debt in place before they can sell equity

4. A firm has operating income of $50 million, interest expense of $18 million, dividends paid of $15 million, and a 40% tax rate, what is net income?
a. $10.2 million
b. $12.8 million
c. $19.2 million
d. $21.0 million

5. A premium bond has a coupon rate that:
a. is less than the yield to maturity.
b. equals zero.
c. must be variable.
d. equals the current yield.
e. exceeds the yield to maturity

ANSWERS: 1. $123,288, 2A, 3C, 4C, 5E

Finance Exam Questions – Can you solve ’em?

/in /by

I haven’t posted in the last three months to this blog because of a heavy teaching load at NYU School of Continuing Professional Studies, where I teach “Fundamentals of Corporate Finance.” Here are five questions from a practice exam I recently gave to my students; how many of these can you solve?

1. If a company with $3 million annual revenue decreases its accounts receivables from 45 days outstanding to 30 days outstanding how much cash is freed up?

2. An investor buys a 30-year, 10% interest bond, for $100,000. If interest rates increase to 20%, the value of this bond would change to:
a. $50,211
b. $91,667
c. $104,762
d. $176,862

3. Which of the following statements distinguishing debt versus equity is true?

a. Debt is an ownership interest, while equity is not
b. A publicly-owned firm’s equity has a fluctuating market price, not its debt
c. An all-debt firm is more likely to go bankrupt than an all-equity firm
d. Companies must have some debt in place before they can sell equity

4. A firm has operating income of $50 million, interest expense of $18 million, dividends paid of $15 million, and a 40% tax rate, what is net income?
a. $10.2 million
b. $12.8 million
c. $19.2 million
d. $21.0 million

5. A premium bond has a coupon rate that:
a. is less than the yield to maturity.
b. equals zero.
c. must be variable.
d. equals the current yield.
e. exceeds the yield to maturity

ANSWERS: 1. $123,288, 2A, 3C, 4C, 5E