DUGAN CORPORATION'S CAPITAL BUDGETING

Sam Dugan is the founder and CEO of Dugan Restaurants, Inc., a regional company. Sam is considering opening several new restaurants. Sally Thornton, the company's CFO, has been put in charge of the capital budgeting analysis. She has examined the potential for the company's expansion and determined that the success of the new restaurants will depend critically on the state of the economy next year and over the next few years.

Dugan currently has a bond issue outstanding with a face value of $$9\mathrm{.}3$ million that is due in one year. Covenants associated with this bond issue prohibit the issuance of any additional debt. This restriction means that the expansion will be entirely financed with equity at a cost of $$3\mathrm{.}7$ million. Sally has summarized her analysis in the following table, which shows the value of the company in each state of the economy next year, both with and without expansion.

$\backslash$table$[[,,$Without,$],[$Economic Growth,Probability,Expansion,With Expansion$],[$Low$,\mathrm{.}30,$$$6,900,000,$$$8,400,000$