McKenzie Corporations Capital Budgeting Assignment

McKenzie Corporations Capital Budgeting - Assignment Example It is of immense importance that one gets the knowledge on the market as well as comprehends the nature of the economy. Based on the calculated values the stockholders are better off with an expansion in the company. This is because the value is higher by $9 million that implies that the firm's value, as well as the profits, would increase. Question 2 Debt of Company - $34 million Expected value of debt without the expansion = 0.30*34 + 0.50*34 + 0.20*34 = $34 million. The expansion is fully financed by equity this implies that the debt does not change. Therefore, the value of expected debt will remain the same with no changes. Question 3 Expected value of the company without expansion =E (value of company) =P (Low)*V (Low) +P (Normal)*V (Normal) + P (High)*V (High) =0.3*30 +0.5*35 + 0.2*51 = $36.7 million Expected value of the company with expansion =E (value of company) =P (Low)*V (Low) + P (Normal)*V (Normal) +P (High)*V (High) - Cost of financing = .30*33 + .50*46 + .20*64 -8.4 = $ 37.3 million The value of debt remains the same this implies that the additional value would be for the stockholders. The value expected for the stockholders = 0.6 million while the expected value for the bondholders =0. Change in the expected net Value due to the expansion =37.3 - 36.7= 0.6 million Question 4 An expansion of the company there will lead to a decrease in debt to equity ratio as well as long-term risk of the company. This is because the equity of the company will rise. The bond value, as well as the price of bonds for the company, will increase. This will also be accompanied by an increase in the profits to both stockholders as well as bondholders of the company (Ross, 390). Without an expansion, the value of bonds in the company will not change. The status of the bondholders remains unchanged, as well. The value of the debt remains as $34 million. Question 5 Without expansion, the equity of the company remains the same in the next year as in the current year. This is since additional capital will not be necessary if there is no expansion. Debt is, therefore, not of the essence in both the present and the future the company as it will not be able to borrow (Ross, 390). This will be in the case where the company continues to decrease their current debt. The company will not have greater equity in the next year once the debt covenants are over. This implies that the company will not access the financing it needs to expand. If the company expands, it will not be able to raise the debt. This is because they are prohibited from issuing any additional borrowing. They would then need to do the expansion by means of equity