Essay on Carson Company

687 Words Jun 5th, 2012 3 Pages
a. In what way is Carson a surplus unit? Carson invests in Treasury securities and therefore is providing funds to the Treasury, the issuer of those securities.

b. In what way is Carson a deficit unit? Carson has borrowed funds from financial institutions.

c. How might finance companies facilitate Carsons expansion? Finance companies can provide loans to Carson so that Carson can expand its operations.

d. How might commercial banks facilitate Carsons expansion? Commercial banks can provide loans to Carson so that Carson can expand its operations. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product
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What is the purpose of this condition? Does this condition benefit the owners of the company? The purpose is to prevent Carson from using the funds in a manner that would be very risky, as Carson may default on its loans if it takes excessive risk when using the funds to expand its business. The owners of the firm may prefer to take more risk than the lenders will allow, because the owners would benefit directly from risky ventures that generate large returns. Conversely, the lenders simply hope to receive the repayments on the loan that they provided, and do not receive a share in the profits. They would prefer that the funds be used in a conservative manner so that Carson will definitely generate sufficient cash flows to repay the loan.

a. Explain why Carson should be very interested in future interest rate movements. The future interest rate movements affect Carsons cost of obtaining funds, and therefore may affect the value of its stock.

b. Given Carsons expectations, do you think that Carson expects interest rates to increase or decrease in the future? Explain. Carson expects the U.S. economy to strengthen, and therefore should expect that interest rates will increase (assuming other things held constant).

c. If Carsons expectations of future interest rates are correct, how would this affect its cost of borrowing on its existing loans and on future loans? Carsons cost of borrowing will increase, because the interest rate on

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