FINANCIAL INTITUITIONS & MARKETS

ISTIAK MAHMUD MITUL

ID: 52044022
 CHAPTER 10 (CASE)
Recall that if the economy continues to be strong,
Carson Company may need to increase its production
capacity by 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 the
yield curve is currently upward sloping. Also recall that
Carson is concerned about a possible slowing of the
economy because of potential Fed actions to reduce
inflation. It is also considering the issuance of stock or
bonds to raise funds in the next year.
Question no. a
If Carson issued stock now, it
would have the flexibility to
obtain more debt and would
also be able to reduce its cost
of financing with debt. Why?
Answer To The Question no. a

1 It can choose to issue stock through IPO( Initial Public

Offerings)

2 The paid-up capital of the firm will increase

post the issue

3 Internal liabilities increase and effects Total Assets

positively.

4 It would be able to leverage its capital to raise

additional debt, up to the debt capacity

5 It has to pay higher interest rate, Considering investors

interest and higher risk in long term investments
 6 Also, to contain options to inflation, Interest rate will be
higher.

As yield is upward slopping, then interest rate

7 is higher in long term than short term
investments

8 Impact on cash flows as periodic payments should be

done

9 In short, an IPO issue would reduce the dependence on

costly debt as a means of financing.

10 To expand, IPO will give a cushion to raise debt capital

in future.
Question no. b
Why would an IPO result in
heightened concerns in
financial markets about
Carson Company’s potential
agency problems?
 Answer To The Question no. b

Agency problem arises when

incentives or motivations
Manager’s Compensation= Profit present themselves to an agent
they made for the firm, not wealth to not act in the full best
they made for the firm. interest of a principal.

E.g. creditors, owners or Principal has the decision-

managers and shareholders and making power, Agent has this to
stockholders and the managers some extent
 Have to face questions
from investors if succeed in Few might be unnecessary
IPO.

If, Reduction happened in Thus, agency problem will

raise
wealth to shareholders.
Question no. c
Explain why institutional investors, such as
mutual funds and pension funds, that invest in
stock for long-term periods (at least a year or
two) might prefer to invest in IPOs rather than
to purchase other stocks that have been publicly
traded for several years.
 Answer To The Question no. c

Because of strong period of

economy, it will generate
more returns to investors. Institutional
Institutional investors
investors
interested
interested to
to take
take the
the gain
gain
on
on the
the day
day of
of listing
listing

If company is strong
enough then institutional
investors will go for it.
Question no. d
Given that institutional investors such as insurance
companies, pension funds, and mutual funds are the major
investors in IPOs, explain the flow of funds that results
from an IPO. That is, what is the original source of the
money that is channeled through the institutional investors
and provided to the firm going public?
 Answer To The Question no. d
The ultimate source Mutual funds, Pension
of funds is Funds, and Insurance
households, Companies constitute
individual investors institutional investors who
and employers also channel funds into the
IPO or equity market for
gains.
The mutual funds,
pension funds. and
insurance companies
invest on behalf of
them.