Question

pate in the financial markets. Interpret the following statements. tory institutions, invest in mutual funds, purchas insurance policies, or invest in pensions? Flow of Funds Exercise Roles of Financial Markets and Institutions This continuing exercise focuses on the interactions of a single manufacturing firm (Carson Company) in the financial markets. It illustrates how financial markets and institutions are integrated and facilitate the flow of funds in the business and financial environment. At the end of every chapter, this exercise provides a list of questions about Carson Company that requires the application of concepts presented in the chapter as they relate to the flow of funds. Carson Company is a large manufacturing firm in California that was created 20 years ago by the Carson family. It was initially financed with an equity investment by the Carson family and 10 other indivi- duals. Over time, Carson Company obtained substan tial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. Thus Carson's cost of obtaining funds is sensitive to inter- est rate movements. It has a credit line with a bank in case it suddenly needs additional funds for a tem porary period. It has purchased Treasury securities that it could sell if it experiences any liquidity problems. Carson Company has assets valued at about $50 mil- lion and generates sales of about $100 million per year. Some of its growth is attributed to its acquisitions of other firms. Because of its expectations of a strong U.S. econ- omy, Carson plans to grow in the future by expanding its business and by making more acquisitions. It expects that it will need substantial long-term financing and plans to borrow additional funds either through loans or by issu- ing bonds. It is also considering issuing stock to raise funds in the next year. Carson closely monitors condi- tions in financial markets that could affect its cash inflows and cash outflows and thereby affect its value. a. In what way is Carson a surplus unit? b. In what way is Carson a deficit unit? c. How might finance companies facilitate Carson's expansion? d. How might commercial banks facilitate Carson's expansion? e. Why might Carson have limited access to additional debt financing during its growth phase? f. How might securities firms facilitate Carson's expansion?

Answer 1

1.) Carson is a surplus unit in the following ways:-

a) Monopoly:- Carson Company has a monopoly market it means carson company is a sole seller in the market which attracts huge number of customers.

b) Roadmap :- when carson company provide a proper roadmap regarding flow of funds as per expectation    of customer.

c) Expanding the Market segment :- Carson Company are willing to enhace their market segment by acquiring        of other firms and establish the business in other places as well which increases their profitability.

d) Goodwill of Company :- Carson Company has a very good reputation(Goodwill) in the market since it is engaging from last 20 years and establish monopoly market.

2.) Carson is a deficit unit in the following ways:-

a) Carson Company fails to provide services to customer in a proper way which impacts surplus.

b) Carson Company fails to make payment of interest or the loan amount as per time limit which affects goowill.

c) When the compititor enter in the same market segment and he provides best services to customers in comparison to carson company.

d) wrong interpretation of concept to customers due to lack of knowledge which decreses the no. of customers.

3.)   Finance Companies Facilitate Funds:-

by provides a auto loans through review the larger companies and they are ready to accept the higher level of risk.

4.) Commercial Companies Facilitate Funds:-

a.) by providing the amount of loan on security basis.

b.) by providing overdraft facility when it requires.

c.) by providing the credit limit as it applicable.

5.) Carson Company has a limited access to additional debt in the growth phase because the amount of interest on debt is to be adjusted in every six months period. By taking a huge amount of loan whuch shows creditibility of the organisation which impacts goodwill as well as affect to loose customers. it will affect acquisition to expand the business as well.

6.) Security Firms will Facilitate to carson company by issuing the Treasury securities, equities and various types of bonds which will help to increase the funds.

7.) Carson Company can facilitate and raise the funds in primary market by issuing the bonds and new issue of stock i.e. initial public offer(IPO).

8.) Carson Company can facilitate in secondary market to find out the best location and to gain the financial benefits which should be economically suitable.

9.) Carson Company can raise funds in the market itself at a very low interest rate which will be very cost effective for company and it reduces the cost of bearing in the perspective of company. if company is successfull to arrange funds from market then it can avoid to raise funds from financial institution due to higher rate of interest.

10.) If company receives bank approval before staring the project then it will be benefited to the company. The condition for this approval is that the money approved by the bank should be utilized only that purpose for which it is approved.

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