I- Case Study: Roles of Financial Markets and Institutions This exercise focuses on the interactions of a single manufacturing firm (Madison 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. Madison Company is a large manufacturing firm in Texas that was created 20 years ago by the Madison family. It was initially financed with an equity investment by the Madison family and ten other individuals. Over time, Madison 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, Madisons cost of obtaining funds is sensitive to interest rate movements. It has a credit line with a bank in case it suddenly needs to obtain funds for a temporary period. It has purchased Treasury securities that it could sell if it experiences any liquidity problems. Madison Company has assets valued at about $50 million 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. economy, Madison plans to grow in the future by expanding its business and through acquisitions. It expects that it will need substantial long-term financing, and plans to borrow additional funds either through loans or by issuing bonds. It is also considering the issuance of stock to raise funds in the next year. Madison closely monitors conditions in financial markets that could affect its cash inflows and cash outflows and therefore affect its value.

g. How might Madison use the primary market to facilitate its expansion?

h. How might it use the secondary market?

i. The loans that Madison has obtained from commercial banks stipulate that Madison must receive the banks approval before pursuing any large projects. What is the purpose of this condition? Does this condition benefit the owners of the company?