food empire

Economic growth Probability With Expansion Without Expansion
High 0.20 S$ 65 million S$55 million
Normal 0.55 S$ 8 million S$ 8 million
Low 0.25 S$ 34 million S$ 30 million

1. What is the expected value of the Company with and without expansion? a b a x b
Probability Without Expansion
0.20 S$55 million S$ 11 million
0.55 S$ 8 million S$ 4.4 million
0.25 S$ 30 million S$ 7.5 million S$ 22.9 million

a b a x b
Probability With Expansion
0.20 S$ 65 million S$ 13 million
0.55 S$ 8 million S$ 4.4 million
0.25 S$ 34 million S$ 8.5 million S$ 25.9 million

2. What is the expected value of the Company’s debt with and without the expansion? a b a x b
Probability With / Without Expansion
0.20 S$ 36 million S$ 7.2 million
0.55 S$ 36 million S$ 9 million
0.25 S$ 36 million S$ 19.8 million S$ 36 million

 The expected value of debt with and without expansion will be the same at the amount of S$36 million because the expansion would be financed with equity. 3. What is the expected value created due to expansion? How much value is expected for bondholders and how much value is expected for stockholders?
 With expansion – without expansion
= S$ 25.9 million – S$ 22.9 million
= S$ 3 million
 Since expansion was entirely financed by equity, there is no change in the level of debt. Thus,
 Expected value for stockholder = S$0
 Expected value for bondholders = S$0

4. What will happen to the bond price if the Company decides to expand?
 If the expansion happens, expected value of equity holders will increase then there will be more equity making the debt to equity ratio decrease. This will make the rate of return also go down on the company bonds.
 This will make the value of bonds and the price of bonds increase in value

5. What is the impact to stockholders if the expansion is financed with cash on hand instead of new equity?
Since the expansion will be financed by cash on hand, the company uses the