Reference no: EM132912275

Problem - How the Flow of Funds Affects Interest Rates - Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six months. Thus, Carson's cost of obtaining funds is sensitive to interest rate movements. Given its expectations that the U.S. economy will strengthen, Carson plans to grow in the future by expanding and by making acquisitions. Carson expects that it will need substantial long-term financing to pay for this growth, and it plans to borrow additional funds either through existing loans or by issuing bonds. The company is also considering the possibility of issuing stock to raise funds in the next year.

a. Explain why Carson should be very interested in future interest rate movements.

b. Given Carson's expectations, do you think the company anticipates that interest rates will increase or decrease in the future? Explain.

c. If Carson's expectations of future interest rates are correct, how would this affect its cost of borrowing on its existing loans and on its future loans?

d. Explain why Carson's expectations about future interest rates may affect its decision about when to borrow funds and whether to obtain floating-rate or fixed-rate loans.