EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 1, Problem 5PROB
Summary Introduction
To determine: Difference between profit maximization and stock price maximization and conditions under which profit maximization doesn’t lead to stock price maximization.
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See the chart below. The top line shows the 90 day yield on corporate bonds and
the bottom line is the US Treasury bill (TB) rate for similar maturity. The yield is
shown on the y-axis. Notice that the gap between the two curves got wider during
the recession years of 2008-2009.
Which of the following reasons can possibly explain this widening?
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2008
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Shaded areas indicate US recessions - 2014 research.stlouisfed.org
A) During the recession, the government decided to cut the tax rate on interest
earned from corporate bonds but not on interest earned on TB.
B) During the recession, the relative risk on corporate bonds increased.
C) During the recession, the relative liquidity of corporate bonds increased.
D) Two of the first three options can explain this.
E) All of the first three options can explain this.
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