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? 26 Part 1! UVIVILI g. How might Carson use the primary market to facil- itate its expansion? h. How might it use the secondary market? If financial markets were perfect, how might this have allowed Carson to avoid financial institutions? The loans that Carson has obtained from commer j. The loans that cial banks stipulate that Carson must receive the bank approval before pursuing any large projects. What is the nurnose of this condition? Does this condition ben. efit the owners of the company
