In 1999 Chrysler had close to $10 billion in cash on its balance sheet invested in short-term securities. Kerkorian, Chrysler’s largest shareholder, wanted Chrysler to use the cash to buy back shares. At the very least, Kerkorian thought that the cash, which yields about 4 percent, should be used to repurchase the company’s outstanding bonds, which yield 7 percent. How can you justify holding cash yielding 4 percent when the firm has bonds that can be retired that yield 7 percent?

AppendixLO1