Finance and Surplus Funds - Assignment Example

FinanceAnswer a.Any surplus funds generated in-house or received as equity by Carson and invested for a short or long duration in bonds as demonstrated by the company by buying Treasury securities is an indication that in a way, Carson is also a surplus unit.Answer b.Carson is a deficit unit because overtime for its business needs, the company needs to borrow funds from various financial institutions and commercial banks. The business needs are ever expanding and the most profitable companies are also deficit of funds and needs to borrow the funds from the financial markets and so is the Carson.Answer c.Finance companies can facilitate Carlson's expansion by providing long term loans to meet the company's fund requirement that are used to buy the long term assets such as machinery, equipments, land and building.

The funds provided by financial institutions are essentially to finance the fixed assets procurement necessary for expansion of the existing business or for totally a new line of business.Answer dCommercial Banks are depository institutions. Deficit units such as Carson are provided loans by commercial banks. Commercial banks have large assets generated by providing the deposit accounts to surplus units. Answer eThe financial institutions look at financial leveraging of the firm such as debt ratio, debt-equity ratio, interest coverage, that decides company’s capacity to pay the interest and original debt over a long period of time.

Obviously, that hinders Carson to access more debt funds for further expansion and growth.Answer fInvestment banks can finance Carson’s expansion by underwriting the equity issued and also help Carson to issue new securities in the market to garner the funds needed from the market.Answer gThe primary market can support expansion program of Carson by absorbing their issued stocks and bonds to the common investors at the predetermined price. The money thus garnered falls under the category of equity or debt as the case may be and can be used to meet the expansion needs.

Answer hCarson can use the secondary market to sell the Treasury Securities that it owns and thus can accumulate the funds for its expansion needs.Answer iThe financial institutions work as financial intermediaries especially, when market is imperfect. When the market is perfect, information is available freely to buyer and seller and market settles at the lowest possible cost of funds discarding the need of any financial institutions for they cannot give any benefit to either buyer or seller.

Answer jEvery commercial bank would like to review the risk profile of the business and the company to whom they have provided the line of credit. Accordingly, it is quite obvious that in case of Carson undertaking any large expansion, commercial banks would like to know how the line of credit provided by them will be used and in what way the new expansion will alter the risk profile of the company. Banks would also like to assess about how the expansion plan of Carson will affect the fund security and the ability of the Carson to pay them the due interest on the borrowed funds.

This condition is not in benefit of the company for they may be restricted to use the funds provided by institutions depending upon their risk assessment.ReferenceMadura, J (2008), Financial Markets and Institutions, Eighth Edition, Mason Ohio, Thomson,