Answer a-e

Financing in the Bond Markets If the economy continues to be strong, Carson Com pany may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Recall that the yield curve is currently upward sloping. Also recall that Carson is concerned about a possible slowing of the economy because of potential Fed actions to reduce inflation. It needs funding to cover payments for sup- plies. It is also considering issuing stock or bonds to raise funds in the next year. b. Carson currently has a large amount of debt, and its assets have already debt. It does not h been pledged to back up its existing ave additional collateral. At this time, the credit risk premium it would pay is similar in the short-term and long-term debt markets. Does this imply that the cost of financing is the same in both markets c. Should Carson consider using a call provision if it issues bonds? Why? Why might Carson decide not to include a call provision on the bonds? d. If Carson issues bonds, it would be a relatively small bond offering. Should Carson consider a private place- a. Assume that Carson has two choices to satisfy the ment of bonds? What type of investor might be inter increased demand for its products. It could increase pro ested in participating in a private placement? Do you duction by 10 percent with its existing facilities by obtaining short-term financing to cover the extra pro-placement as it could on a public placement? Explain. duction expense and then using a portion of the revenue e. Financial institutions such as insurance companies received to finance this level of production in the future. a Alternatively, it could issue bonds and use the proceeds to buy a larger facility that would allow for 50 percent more institutions and ultimately reaches corporati capacity. Which alternative should Carson select? think Carson could offer the same yield on a private and pension funds commonly purchase bonds. Explain the flow of funds that runs through these financial issue bonds such as Carson Company. ype here to search Financing in the Bond Markets If the economy continues to be strong, Carson Com pany may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Recall that the yield curve is currently upward sloping. Also recall that Carson is concerned about a possible slowing of the economy because of potential Fed actions to reduce inflation. It needs funding to cover payments for sup- plies. It is also considering issuing stock or bonds to raise funds in the next year. b. Carson currently has a large amount of debt, and its assets have already debt. It does not h been pledged to back up its existing ave additional collateral. At this time, the credit risk premium it would pay is similar in the short-term and long-term debt markets. Does this imply that the cost of financing is the same in both markets c. Should Carson consider using a call provision if it issues bonds? Why? Why might Carson decide not to include a call provision on the bonds? d. If Carson issues bonds, it would be a relatively small bond offering. Should Carson consider a private place- a. Assume that Carson has two choices to satisfy the ment of bonds? What type of investor might be inter increased demand for its products. It could increase pro ested in participating in a private placement? Do you duction by 10 percent with its existing facilities by obtaining short-term financing to cover the extra pro-placement as it could on a public placement? Explain. duction expense and then using a portion of the revenue e. Financial institutions such as insurance companies received to finance this level of production in the future. a Alternatively, it could issue bonds and use the proceeds to buy a larger facility that would allow for 50 percent more institutions and ultimately reaches corporati capacity. Which alternative should Carson select? think Carson could offer the same yield on a private and pension funds commonly purchase bonds. Explain the flow of funds that runs through these financial issue bonds such as Carson Company. ype here to search