Assignment # 1

Carson Company is a large manufacturing firm in California that was created about 20 years ago
by Carson family. It was initially financed by with an equity investment by the Carson family
and 10 others individuals. Over time, Carson family has obtained substantial loans from finance
companies and commercial banks. The interest rate on the loan is tied to market interest rate and
adjusted every six months. Thus, Carson cost of borrowing is sensitive to interest rate
movements. It has a credit line with the bank for obtain of funds on urgent basis. It had
purchased Treasury securities that it could sell if it faces any liquidation problems.

It has assets valued at $50m and generates sales of $100m per year. Some of its growth is
attributed to its acquisition of other firms. Carson hopes to do so i.e expansion by acquiring
other businesses. It expects it needs substantial long term financing and plans to borrow
additional funds by loans or by bonds. It is also considering issuing of stocks to raise funds in the
next year. Carson closely monitors conditions in the financial markets that could affect its cash
inflow and cash outflow and ultimately affects its values.

a. How might finance companies facilitate Carson expansion

b. Why might Carson have limited access to additional debt financing during its growth
phase

c. How might Carson use Secondary market to facilitate its expansion

d. How Carson Brothers is exposed to adverse selection