1. How might financial institutions facilitate Carson’s expansion? 2. If financial markets were perfect or strong-form efficiency, how might this factor have allowed Carson to avoid financial institutions?
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 ten
other individuals. Over time, Carson Company has obtained substantial loans from finance
companies and commercial banks. The interest rates on those loans are tied to market interest
rates and are adjusted every six months. Thus, Carson’s cost of obtaining funds is sensitive to
interest rate movements.
The company 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.
Carson Company has assets valued at approximately $50 million and generates sales of nearly
$100 million per year. Some of its growth is attributed to its acquisitions of other firms. Because
it expects the economy to be strong in the future, Carson plans to grow by expanding its business
and making more acquisitions. It expects that it will need substantial long-term financing and
plans to borrow additional funds either through obtaining loans or by issuing bonds. It is also
considering the issuance of stock to raise funds in the next year. Carson closely monitors
conditions in financial markets that could affect its
affect its value.
1. How might financial institutions facilitate Carson’s expansion?
2. If financial markets were perfect or strong-form efficiency, how might this factor have
allowed Carson to avoid financial institutions?
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