Good afternoon:Please answer the questions in the attached document. I laid it out so that it will be as easy as possible to work with to record answers.Thank you and have a great evening.

Bernie Gray, Sr. FINC 395A February 14, 2016 Week 5 Dropbox Assignment TEXT BOOK: FINANCIAL MARKETS AND INSTITUTIONS by Jeff Madura, 11th edition Chapter 13, Pg 367 Flow of Funds Exercise: HEDGING WITH FUTURES CONTRACTS Recall that if the economy continues to be strong, Carson company 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. Carson currently relies mostly on commercial loans with floating interest rates for its debt financing. QUESTIONS: a. b. Chapter 14, Pg 399 Flow of Funds Exercise: HEDGING WITH OPTION CONTRACTS Carson Company would like to acquire Vinnet, Inc., a publicly traded firm in the same industry. Vinnet's stock price is currently much lower than the prices of other firms in the industry because it is inefficiently managed. Carson believes that it could restructure Vinnet's operations and improve its performance. It is about to contact Vinnet to determine whether Vinnet will agree to an acquisition. Carson is somewhat concerned that investors may learn of its plans and buy Vinnet stock in anticipation that Carson will need to pay a higher premium (perhaps a 30 percent premium above the prevailing stock price) in order to complete the acquisition. Carson decided to call a bank about its risk, as the bank has a brokerage subsidiary that can help it hedge with stock options. QUESTIONS: a.How can Carson use stock options to reduce its exposure to this risk? Are there any limitations to this strategy, given that Carson will ultimately have to buy most or all of the Vinnet stock? b. Describe the maximum possible loss that may be directly incurred by Carson as a result of engaging in this strategy. c. Explain the results of the strategy you offered in the previous question if Vinnet plans to avoid the acquisition attempt by Carson. Chapter 15, Pg 436 Flow of Funds Exercise: HEDGING WITH INTEREST RATE DERIVATIVES Recall that if the economy continues to be strong, Carson company 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. Carson currently relies mostly on commercial loans with floating interest rates for its debt financing. It has contacted Blazo Bank about the use on interest rate derivatives to hedge the risk. QUESTIONS: a. How could Carson use interest rate swaps to reduce the exposure of its cost of debt to interest rate movements? b. What is a possible disadvantage of Carson using the interest rate swap hedge as opposed to no hedge? c.How could Carson use an interest rate cap to reduce the exposure of its cost of debt to interest rate movements? d.What is possible disadvantage of Carson using the interest rate cap hedge as opposed to no hedge? Explain the trade-off between using an interest rate swap versus an interest rate cap. Chapter 16, Pgs 458 & 459 Flow of Funds: HEDGING WITH FOREGIN EXCHANGE DERIVATIVES Carson company expects that it will receive a large order from the government of Spain. If the order occurs, Carson will be paid about $3 million euros. Since all of its expenses are in dollars, Carson would like to hedge this position. Carson has contacted a bank with brokerage subsidiaries that can help it hedge with foreign exchange derivatives. QUESTIONS: a. How could Carson use currency futures to hedge its position? b. What is the risk of hedging with currency futures? c. How could Carson use currency options to hedge its position? d. Explain the advantage and disadvantage to Carson of using currency options instead of currency futures. Bernie Gray, Sr. FINC 395 February 7, 2016 Week 4 Dropbox Assignment Chapter 10, Pgs 278 & 279 Flow of Funds: a. While the economy is strong, interest rates are low. Carson can issue stocks at a lower rate of interest subject to the current low rates in the market as one way of reducing its cost of debt. If Carson supports some of its growth with stock, it changes its capital structure to include more equity that does not require a cash outflow (no interest payments). In addition, Carson has the opportunity to obtain debt while interest rates are lower. Therefore, Carson will be able to finance its production capacity expansion by 50 percent keeping the cost of its debt overall debt (financing and stock issues) low. b. If Carson goes public to raise capital, it will be subject to SEC rules that require a certain procedure be followed before a IPO can be issued. There is a minimum size of $50,000,000 to insure liquidity. (Madura, p. 254) Carson will have to prepare a prospectus detailing its operations and financial condition so that investors will have needed information to determine a buy of the IPO. The IPO will have to be priced and transaction costs will have to be determined. Before it can sell the IPO, all of the aforementioned information has to be submitted to the SEC for approval. Publicly traded companies have to avoid \"insider trading\" unless this information is known only among the internal officials and employees would render the use of the information legal. If stocks are purchased by persons inside the firm, this activity has to be reported to the SEC. All other use of \"insider information\" is illegal. The company must now work in the best interest of the investors once they have an interest in the company via stocks. c. Investors' perception may be that the market does not properly price newly issued stock (IPOs), and they may be able to capitalize on this discrepancy by investing in IPOs. d. The money invested by insurance companies comes from insurance premiums paid by policyholders. The money invested by pension funds comes from retirement accounts of employees and their employers. The money invested by mutual funds comes from shareholders who want their investments managed by a fund manager to invest their investments. Chapter 11, Pg 308 Flow of Funds Exercise: Valuing Stocks a. Price earnings ratio is used to predict the fair market value by predicting the future earnings. If the investors believe that future earnings will be higher than they will give a higher valuation of the stock so Carson can raise money at a higher valuation. b. There are certain advantages and disadvantages for issuing the stocks. Carson needs to compare the what the cost of capital is for issuing stocks and bonds as the interest paid on bonds is tax deductible and dividends are not tax deductible. Carson has to pay the interest to bondholders if they issue the bonds. Dividend payments are not necessarily required and may be paid at the discretion of the board of directors, so looking at the cash flow position decision can be made. However, when stock is issued, this means giving some ownership rights in the company to stockholders, so all this should be considered before deciding to issue stock or bonds. It is better to issue stocks than bonds. c. Higher stock prices at the time of issuing IPOs is important as the company can raise more revenues for its IPOs. Carson could sell a secondary issue in the future to raise funds to acquire targeted acquisitions at that time. If the stock price is higher at the second issue, then Carson can acquire the target firms. As the stock increases in value, will allow stock to be given to employees and shareholders as compensation to executives, shareholders and employees adding more motivating employees and promoting loyalty from stockholders. d. Stock given as compensation gives employees the feeling of ownership. They are considered as owners of the company and not employees as they own the stocks of the company. This will motivate them to perform well as higher profit of the company are ascertained, employees will be more motivated to as they could receive more dividends as well as capital growth of the stock. Issuing employees shares of stock might shift the focus of the employee to short term goals. As they do well in the short term, the stock price will increase and they will be able to capitalize on the earnings by selling the stock in the market to earn more money rather than looking to maximizing shareholders' wealth. A firm can provide stock as motivation, but prevent its managers from using a short term focus by preventing them to sale the shares for specified period of time, say three to five years from the date of issuing them the shares. This will motivate and focus them on maximizing shareholder wealth rather than using a short term focus. Chapter 12, Pgs 337 & 338 Flow of Funds Exercise: Shorting Stocks a. Carson could provide timely and detailed financial reports, and could use a reporting system that allows for transparency so that its operations can be easily monitored. b. Carson could repurchase some of its shares in the market, which would allow it to obtain shares at a low price. It could issue more shares later once the share price rises. Its actions would be beneficial to its shareholders. The risk is that Carson is wrong in its perception, which could cause it to repurchase shares before the price declines further. In this case, its actions would not satisfy shareholders. Bernie Gray, Sr. FINC 395A February 14, 2016 Week 5 Dropbox Assignment TEXT BOOK: FINANCIAL MARKETS AND INSTITUTIONS by Jeff Madura, 11th edition Chapter 13, Pg 367 Flow of Funds Exercise: HEDGING WITH FUTURES CONTRACTS Recall that if the economy continues to be strong, Carson company 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. Carson currently relies mostly on commercial loans with floating interest rates for its debt financing. QUESTIONS: a. b. Chapter 14, Pg 399 Flow of Funds Exercise: HEDGING WITH OPTION CONTRACTS Carson Company would like to acquire Vinnet, Inc., a publicly traded firm in the same industry. Vinnet's stock price is currently much lower than the prices of other firms in the industry because it is inefficiently managed. Carson believes that it could restructure Vinnet's operations and improve its performance. It is about to contact Vinnet to determine whether Vinnet will agree to an acquisition. Carson is somewhat concerned that investors may learn of its plans and buy Vinnet stock in anticipation that Carson will need to pay a higher premium (perhaps a 30 percent premium above the prevailing stock price) in order to complete the acquisition. Carson decided to call a bank about its risk, as the bank has a brokerage subsidiary that can help it hedge with stock options. QUESTIONS: a.How can Carson use stock options to reduce its exposure to this risk? Are there any limitations to this strategy, given that Carson will ultimately have to buy most or all of the Vinnet stock? b. Describe the maximum possible loss that may be directly incurred by Carson as a result of engaging in this strategy. c. Explain the results of the strategy you offered in the previous question if Vinnet plans to avoid the acquisition attempt by Carson. Chapter 15, Pg 436 Flow of Funds Exercise: HEDGING WITH INTEREST RATE DERIVATIVES Recall that if the economy continues to be strong, Carson company 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. Carson currently relies mostly on commercial loans with floating interest rates for its debt financing. It has contacted Blazo Bank about the use on interest rate derivatives to hedge the risk. QUESTIONS: a. How could Carson use interest rate swaps to reduce the exposure of its cost of debt to interest rate movements? b. What is a possible disadvantage of Carson using the interest rate swap hedge as opposed to no hedge? c.How could Carson use an interest rate cap to reduce the exposure of its cost of debt to interest rate movements? d.What is possible disadvantage of Carson using the interest rate cap hedge as opposed to no hedge? Explain the trade-off between using an interest rate swap versus an interest rate cap. Chapter 16, Pgs 458 & 459 Flow of Funds: HEDGING WITH FOREGIN EXCHANGE DERIVATIVES Carson company expects that it will receive a large order from the government of Spain. If the order occurs, Carson will be paid about $3 million euros. Since all of its expenses are in dollars, Carson would like to hedge this position. Carson has contacted a bank with brokerage subsidiaries that can help it hedge with foreign exchange derivatives. QUESTIONS: a. How could Carson use currency futures to hedge its position? b. What is the risk of hedging with currency futures? c. How could Carson use currency options to hedge its position? d. Explain the advantage and disadvantage to Carson of using currency options instead of currency futures