Hi,

Could a tutor please verify my worksheet and correct were I am wrong for Corporate Finance Mini Case 17 10th edition.

Mini Case: McKenzie Corporation Capital Budgeting Group 3 FIN 620 Fall 2015 Facts Bond Issue Face Value Term Equity Cost $ 29,000,000.00 1 $ 5,700,000.00 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? Economic Growth Low Normal High Probability Expected Value of Firm without and with Expansion Without Expansion With Expansion Firm Value without Expansion 0.30 $ 25,000,000.00 $ 27,000,000.00 $ 7,500,000.00 0.50 $ 30,000,000.00 $ 37,000,000.00 $ 15,000,000.00 0.20 $ 48,000,000.00 $ 57,000,000.00 $ 9,600,000.00 $ 32,100,000.00 Firm value increase with expansion compared to without expansion for Stockholders Firm value increase with expansion compared to without expansion 2. What is the expected value of the company's debt in one year, with and without expansion? 2. One year Debt Expected value Low Normal High Expected value of the Company's debt one year with and without Expansion Probability Without Expansion With Expansion Firm Value without Expansion 0.30 $ 25,000,000.00 $ 27,000,000.00 $ 7,500,000.00 0.50 $ 29,000,000.00 $ 29,000,000.00 $ 14,500,000.00 0.20 $ 29,000,000.00 $ 29,000,000.00 $ 5,800,000.00 2 Expected Value of Debt $ 27,800,000.00 Firm value increase one year with expansion compared to without expansion Firm Value with Expansion $ 8,100,000.00 $ 18,500,000.00 $ 11,400,000.00 $ 38,000,000.00 $ 200,000.00 $ 5,900,000.00 Firm Value with Expansion $ 8,100,000.00 $ 14,500,000.00 $ 5,800,000.00 $ 28,400,000.00 $ 600,000.00 3. One year from now, how much value creation is expected from the expansion? How much value is expected for stockholders? Bondholders? 3. One year value from expansion Low Normal High Probability Expected Value Creation from Expansion Without Expansion With Expansion Firm Value without Expansion Firm Value with Expansion 0.30 $ - $ 0 0 0.50 $ 1,000,000.00 $ 8,000,000.00 $ 500,000.00 $ 4,000,000.00 0.20 $ 19,000,000.00 $ 28,000,000.00 $ 3,800,000.00 $ 5,600,000.00 3 Expected Value of Equity $ 4,300,000.00 $ 9,600,000.00 Expected values for Stockholders $ 5,300,000.00 Expected value for Bondholder $ 600,000.00 Stockholder NPV $ (400,000.00) 4. If the company announces that it is not expanding, what do you think will happen to the price of its bonds? What will happen to the price of the bonds if the company does expand? If firm expands, result will be increase in the interest rate and stockholder's value. Bond value remains the same. If firm does not expand the price of the bond will increase 5. If the company opts not to expand, what are the implications for the company's future borrowing needs? What are the implications if the company does expand? If firm does not expand, bond value remains the same result will make interest rate fall in the future. Firm expands, interest rebates will rise and attract new stock holders 6. Because of the bond covenant, the expansion would have to be finance with equity. How would it affect your answer if the expansion were financed with cash on hand instead of new equity? If the expansion of the firm is with cash in hand, results in no increase to shareholders, no increase in interest rates for the stockholders, because expansion is with the cash in hand that is kept by the firm