Bus 650 Managerial Finance Closing Case Pg 489
Closing Case Pg 489
1.What is the expected value of the company in one year, with and without expansion? Would the company stockholders be better off with or without expansion? Why?
The expected values of the company without expansion goes as followed
(.3)(11,000,000)+(.5)(17,500,000)+(.2)(22,5000,000)=165,500,000
The expected value of the company with expansion goes as followed:
(.3)(13,000,000)+(.5)(24,000,000)+(.2)(28,500,000)=215,000,000
(215,000,000)-(4,500,000(cost))=170,000,000
Would the company stockholders be better off with or without expansion?
The stockholders would be better off with expansion because the value of the company would increase by 4,5000,000. As the pie model shows on page 467, the shareholders and bondholders received the majority of the firm, therefore higher numbers in regards to the value of the company would be in their best interest.
2.What is the expected value of the company debt in one year, with and without the expansion? Since there is a bond that is outstanding that is 14 million dollars and the expansion is being financed with the equity which is 4.5million dollars the company debt in one year with and without the expansion would be 18.5 million.
3.One year from now, how much value creation is expected from the expansion? How much value is expected for stockholder? Bondholders?
(.3)(11,000,000)+(.5)(17,500,000)+(.2)(22,5000,000)=165,500,000
(.3)(13,000,000)+(.5)(24,000,000)+(.2)(28,500,000)=215,000,000
(215,000,000)-(4,500,000(cost))=170,000,000
70,000,000-165,5000,000=4,500,000
The value that is created from expansion would be 4,500,000
The value expected for the stockholders would be 4,500,000
4.If the company announces that it is not expanding, what do you think will happen to the price of the bonds? What will happen to the price of the bonds if the company does expand?
I believe if the company announces that it is not expanding then the prices of the bonds would not
1.What is the expected value of the company in one year, with and without expansion? Would the company stockholders be better off with or without expansion? Why?
The expected values of the company without expansion goes as followed
(.3)(11,000,000)+(.5)(17,500,000)+(.2)(22,5000,000)=165,500,000
The expected value of the company with expansion goes as followed:
(.3)(13,000,000)+(.5)(24,000,000)+(.2)(28,500,000)=215,000,000
(215,000,000)-(4,500,000(cost))=170,000,000
Would the company stockholders be better off with or without expansion?
The stockholders would be better off with expansion because the value of the company would increase by 4,5000,000. As the pie model shows on page 467, the shareholders and bondholders received the majority of the firm, therefore higher numbers in regards to the value of the company would be in their best interest.
2.What is the expected value of the company debt in one year, with and without the expansion? Since there is a bond that is outstanding that is 14 million dollars and the expansion is being financed with the equity which is 4.5million dollars the company debt in one year with and without the expansion would be 18.5 million.
3.One year from now, how much value creation is expected from the expansion? How much value is expected for stockholder? Bondholders?
(.3)(11,000,000)+(.5)(17,500,000)+(.2)(22,5000,000)=165,500,000
(.3)(13,000,000)+(.5)(24,000,000)+(.2)(28,500,000)=215,000,000
(215,000,000)-(4,500,000(cost))=170,000,000
70,000,000-165,5000,000=4,500,000
The value that is created from expansion would be 4,500,000
The value expected for the stockholders would be 4,500,000
4.If the company announces that it is not expanding, what do you think will happen to the price of the bonds? What will happen to the price of the bonds if the company does expand?
I believe if the company announces that it is not expanding then the prices of the bonds would not