Read the paragraph on Carson Company and answer D-E

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