3. You’re the CFO of Nildorf Inc., a maker of luxury consumer goods that, because of its product, is especially sensitive to economic ups and downs (people cut back drastically on luxury items during recessionary times). In an executive staff meeting this morning, Charlie Suave, the president, proposed a major expansion. You felt the expansion would be feasible if the immediate future looked good, but were concerned that spreading resources too thin in a recessionary period could wreck the company. When you expressed your concern, Charlie said he wasn’t worried about the economy because the spread between AAA and B bonds is relatively small, and that’s a good sign. You observed, however, that rates seem to have bottomed out recently and are rising along with the differential between strong and weak companies. After some general discussion, the proposal was tabled pending further research. Later in the day, Ed Sliderule, the chief engineer, came into your office and asked, “What in the world were you guys talking about this morning?”

Prepare a brief written explanation for Ed.