Take this quiz to test your knowledge of William Ackman's finance and investing lecture. Find the answer key at the bottom, as well as an additional quiz on the assigned reading!
(1.) When starting a company, what is the advantage of taking out loans over selling stock?
- (A.) When you take out a loan, the person or entity that loans you the money has a greater interest in seeing your business succeed than does a person or entity who buys stock.
- (B.) When you sell stock in your company you dilute its overall value, while debt owed is a separate liability and does not affect your overall valuation.
- (C.) While selling stock raises money without taking on a debt liability, the amount of money you can raise through loans is much greater and can be collected more quickly.
- (D.) When you take out a loan, you owe debt but you maintain the same level of control over your company, whereas selling stock means that you own less of the business than you did before.
(2.) If your business loses money in its first year, all of the following assumptions could encourage you to stay open EXCEPT:
- (A.) The market for your product is weak, and you expect that competitors will go out of business, allowing you to consolidate a larger customer base and achieve profitability.
- (B.) Now that you’ve established your brand, you can make the assumption that demand will grow and that you will be able to sell more of your product every year.
- (C.) Opening up more locations for your business, or increasing production of your product, will allow your business model to scale up and achieve profitability.
- (D.) Now that you’ve established your brand, you can charge more for your product every year, which will improve profitability in the long run.
(3.) Which statement best characterizes the respective advantages of debt vs. equity for an investor?
- (A.) Debt has a lower return on investment than equity, because if a business fails the debt holder gets paid back before the equity holder, thus taking on less risk.
- (B.) Equity has a lower return on investment than debt, because if a business fails the equity holder gets paid back before the debt holder, thus taking on less risk.
- (C.) Debt has a lower return on investment than equity, because a debt holder is only entitled to a yearly interest payment at a fixed rate, even if the business fails, whereas an equity holder can receive very high returns per share owned if the business is very successful.
- (D.) Equity has a higher return on investment than debt, because equity holders must pay far more to acquire a profitable amount of stock, and if the business is successful the greater initial investment of the equity holder will generate a greater profit.
(4.) All of the following are ways to extract profit from the business you own EXCEPT:
- (A.) Taking your business public with an initial public offering, which will sell part of your company in the form of publically traded stocks.
- (B.) Selling part of your business to a private investor, who will from that point forward control a portion of the business.
- (C.) Paying out a dividend from profits to all stock holders; as a large stock holder, you will receive a proportionate amount of the total paid out.
- (D.) Setting aside a portion of the year-end profits for your business and directing it toward personal use.
(5.) How can you generate a valuation of your company?
- (A.) Examine other businesses similar to yours that are publically traded, and determine how many times earnings per share the competitor is trading for; apply this multiple to your own earnings per share.
- (B.) Examine other businesses similar to yours that are publically traded; calculate the average share price for competing businesses, and set your valuation above or below this average based on your expected level of growth.
- (C.) Calculate the average yearly profits you have earned with your business thus far in its existence; assume that your business will last for twenty years, and multiply your average yearly profits by 20 to calculate your valuation.
- (D.) Add up all of the assets currently held by your business, and also add up all of the profits you have thus far earned. Multiply these two numbers together, and divide by the amount of outstanding shares in your company to determine your valuation.
(6.) Which of the following pieces of advice would Bill Ackman most likely agree with?
- (A.) Start investing in your early thirties once you’ve cleared your debts and saved up money, then invest with a low-risk, low-return mentality; while your returns overall will be modest, you will have enough money accrued to supplement your retirement plan without taking huge risks.
- (B.) Start investing in your early twenties with a low-risk, low-return mentality; your upside is limited, but you are unlikely to lose money at any point and will end up with a comfortable retirement fund.
- (C.) Start investing in your early thirties once you’ve cleared your debts and saved up money, then invest with a high-risk, high-return mentality; because you’re starting out later, you must make up for the lost time with big returns to end up with comfortable retirement fund.
- (D.) Start investing in your early twenties with a high-risk, high-return mentality; you will take periodic losses but end up with a healthy retirement fund.
(7.) Which of the following businesses would William Ackman be most likely to recommend investing in?
- (A.) A real estate firm that has had a lot of success in building condos in a rapidly gentrifying neighborhood.
- (B.) An internet start-up that is heralded as the Spotify for TV Shows.
- (C.) A new fusion restaurant managed by one of the most successful chefs in the country.
- (D.) A company that has been manufacturing a popular brand of toothpaste since WWII.
(8.) Which of the following businesses would William Ackman be most likely to recommend investing in?
- (A.) A hedge fund that generates high profits for investors using complicated financial instruments that even their competitors can’t reverse-engineer.
- (B.) An electric car company that has taken the country by storm, and plans to build more plants to meet demand.
- (C.) A snow shovel manufacturer that has been privately held by one family for three generations.
- (D.) A well-liked regional fast food chain that has slowly expanded for years, and now plans to go national.
(9.) According to Ackman, all of the following are ways to withstand market volatility EXCEPT:
- (A.) Have an established level of financial security, so you’re not emotionally invested in your entire livelihood through your investment vehicles.
- (B.) Fortify yourself against psychological panics and short-term fluctuations in the market; buy when people are selling and sell when people are buying.
- (C.) Make sure that you do your own footwork in researching a company and understanding its profit model, so you can invest at a reasonable price and won’t be sideswiped by an unexpected fallout or a bubble.
- (D.) Set up your investments in managed, blind trusts, so you are unable to interfere with your portfolio for long stretches of time, other than cashing in or cashing out at allowed intervals.
(10.) Which of the following descriptions of a mutual fund most closely matches a mutual fund that William Ackman would recommend?
- (A.) The mutual fund is a small, independent outfit that was started four years ago by an investment savant straight out of college. The returns are very high and there’s a huge demand to invest in this upstart firm.
- (B.) The mutual fund manager displays a mastery of complicated financial jargon, and makes the investment strategy out to be so complex that no layman could understand the process.
- (C.) The mutual fund specializes in “shorting” stocks, that is, buying stocks with the expectation that they will decline in value after a period of speculation drives the price up.
- (D.) The mutual fund manager has been in business for ten years, and has a consistent approach that yields a stable, if middle-of-the-road, return on money invested in the fund.
Answer Key: (1.) D, (2.) D, (3.) A, (4.) C, (5.) A, (6.) D, (7.) B, (8.) C, (9.) B, (10.) B