Explore BrainMass

Explore BrainMass

    Value of the company with or without expansion

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    From Corporate Finance 9/e (Ross, Westerfield, Jaffe) pg 552

    Company plans to expand in one year.

    Has outstanding bond with face value of $34 million due in one year.
    Bond covenants prohibit issuance of additional debt.
    Expansion will be equity financed at cost of $8.4 million.

    State of comapny in three states if economy with or without expansion:

    Economic growth probability with expansion without expansion

    low .30 $30,000,000 $33,000,000

    normal .50 35,000,000 46,000,000

    high .20 51,000,000 64,000,000

    Calculate:

    1. Expected value of company in one year, with and without expansion

    2. expected value of debt in one year, with and without expansion

    3. in one year how much value creation from expansion?
    how much for stockholder? Bondholder?

    4. if company does not expand, what happens to price of bonds?
    what happens to price if they do expand?

    5. if no expansion, what are implications for future borrowing needs?
    what are implications if it does expand?

    6. How would answer be affected if expansion were financed with cash
    on hand instead of new equity?

    © BrainMass Inc. brainmass.com June 4, 2020, 12:47 am ad1c9bdddf
    https://brainmass.com/business/cash/value-of-the-company-with-or-without-expansion-360174

    Solution Preview

    See the attached file. Thanks

    mckenzie corporation's corporate structuring

    Company plans to expand in one year. 

    Has outstanding bond with face value of $34 million due in one year. 
    Bond covenants prohibit issuance of additional debt. 
    Expansion will be equity financed at cost of $8.4 million. 

    State of company in three states if economy with or without expansion: 

    Economic Growth Probability With Expansion Without Expansion

    Low 0.3 $30,000,000 $33,000,000
    Normal 0.5 $35,000,000 $46,000,000
    High 0.2 $51,000,000 $64,000,000

    Calculate: 

    1. Expected value of company in one year, with and without expansion 
    With Expansion Without Expansion
    Expected value $36,700,000 $45,700,000 ...

    Solution Summary

    This post has multiple problems. It shows how to calculate expected value of company and debt , with and without expansion and how much value creation from expansion, for stockholder and Bondholder. It discusses about price of bonds etc.

    $2.19

    ADVERTISEMENT