McKenzie Corporations Financial Capital Budgeting

Mckenzie Corporation's Capital Budgeting Given value of Mckenzie in different scenarios, Economic Growth Probability Without Expansion With Expansion Low $20,000,000 $22,000,000 Normal $25,000,000 $32,000,000 $43,000,000 $52,000,000 Expected value of the company within one year with Expansion is as follows: = Formula of E (value of company) = "P (Low)*V (Low) + P (Normal)*V (Normal) + P (High)*V (High)" =0.3*22,000,000 +0.5*32,000,000 +0.2*52,000,000 = 6,600,000 + 16,000,000 + 10,400,000 = $33,000,000 = $33 Million. Expected value of the company within one year without Expansion is as follows: = P (Low)*V (Low) + P (Normal)*V (Normal) + P (High)*V (High) = .30*20,000,000 + .50*25,000,000 + .20*43,000,000 =6,000,000 + 12,500,000 + 8,600,000 = $27,100,000 = $27.1 Million. Answer 2) Company's debt is $25 million.

Thus, the expected value of the company debt without expansion = .30*25,000,000 + .50*25,000,000 + .20*25,000,000 = $7,500,000 + $12,500,000 + $5,000,000 = $25 million Thus, the expected value of the company debt will remain the same which is $25 million with expansion since the company is fully funded by the equity, and debt does not change. Answer 3) Expected company value without expansion =$27.1 million Expected company value with expansion =$ 33 million Thus, a change in expected value of the company due to expansion = 33-27.1= $5.9 million Equity of $ 5.7 million was required to fund the expansion.

Thus, Net Value that is created by expansion = 5.9 million -- 5.7 million = $0.2 million Since the company expansion are entirely financed by the equity, there will be no change in the level of debt. Thus, Expected value for stockholder = $0.2 million Expected value for bondholders = $0. Answer 4) Case 1: Company does not expand: If the company does not expand, there will be no change in the status of the bondholders since the debt of $25 million remains the same. Thus, there will be no change in the value of the bonds.

Case 2: Company expands: If the company expands, the expected value of equity holders will rise. Thus, the value of the equity will also increase, which will decrease the debt-equity ratio. Thus, the long-term solvency risk will decrease. It will lead to a low cost of debt, and can be reflected by an increase of the price of bond since the value of the bond will go up. Answer 5) If the company decides not to expand, the.