fundamentals of corporate finance 11th canadian edition test bank.docx
Chapter 8 Notes
1. Jumpstart Assignment
Do you think it’s possible for America
to ever experience a second Great
Depression. Explain your answer.
2. Causes of the Great Depression
• The 1920’s were a time of great prosperity
for most American’s.
• Republican’s took credit for the bullish
economy
• 1928, Americans voted overwhelmingly
for Herbert Hoover, prosperity, and the
Republican economic policy.
3. Problems in the Economy - Farmers
• Farmers made up 25% of the American
workforce.
• WWI caused prices of crops to soar, at the
same time, new machines made farming more
efficient.
• Demand falls for crops at the end of war, and at
the same time farmers are producing more
crops.
4. Problems in the Economy - Wealth
• In the 1920’s wages rise slowly (8%) while
productivity increased rapidly (32%).
• Corporate profits skyrocketed (65%).
• 60% of Americans earned <$2,000/year
• 24,000 families made more than $100,000/year
• The rich weren’t buying 50 times as much, though
they were making 50 times as much.
• Lack of a strong middle class
5. Problems in the Economy - Credit
• Easy credit (installment buying) makes
American’s feel richer than they are.
–60% of cars were bought on credit
–80% of radios
6. The Stock Market Crashes
• Many American’s poor money in to the stock
market speculation – putting money that you
don’t have in the market, gambling that it will
go up.
• October 29, 1929 - Black Tuesday – stock
market crashes, fortunes are wiped out in a
matter of hours.
–Represented a hallmark of the nations
business cycle – periodic growth and
contraction in the economy
7. The Depression Begins
• The Great Depression lasts from 1929 – 1941, a
period in which the economy failed and
unemployment soared.
–Banks collapse – depositors fear that they
might lose their money and storm the banks
to get their money.
– The Federal Reserve restricts money supply,
which makes the problem worse.
8. Depression Continues
• Businesses close, causing unemployment to
rise.
• Tariffs further slow down the economy
–Hawley-Smoot Tariff – raises the price of
foreign imports so high that they cannot
compete in the American market.
• The Depression spreads to the rest of the world.
