Recall that Carson Company has obtained substantial 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, its cost of obtaining funds is sensitive to interest rate movements. Given its expectations that the U.S. economy will strengthen, Carson plans to grow in the future by expanding its business and through acquisitions. Carson expects that it will need substantial long-term financing to pay for this growth, and it plans to borrow additional funds either through loans or by issuing bonds. The company is considering the issuance of stock to raise funds in the next year.

a. Explain why Carson should be very interested in future interest rate movements. 

b. Given Carson’s expectations, do you think that the company anticipates that interest rates will increase or decrease in the future? Explain. 

c. If Carson’s expectations of future interest rates are correct, how would this affect its cost of borrowing on its existing loans and on future loans?

d. Explain why Carson’s expectations about future interest rates may affect its decision about when to borrow funds and whether to obtain floating-rate or fixed-rate loans.