Finance and Surplus Funds Assignment Example | Topics and Well Written Essays - 500 words - 3

Finance and Surplus Funds - Assignment Example Finance companies can facilitate Carlsons expansion by providing long-term loans to meet the company's fund requirement that is used to buy the long-term assets such as machinery, equipment, land and building. The funds provided by financial institutions are essential to finance the fixed assets procurement necessary for the expansion of the existing business or for totally a new line of business. Commercial 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. The 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. The 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. The financial institutions work as financial intermediaries especially, when the market is imperfect. When the market is perfect, information is available free 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. Every 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.