If the firm announces that it is not expanding, what do you think will happen to

the price of its bonds? (2 marks) What will happen to the price of the bonds if

the company does expand? (2 marks) Briefly explain in words.

Jason is the CEO of CU Caf. Jason is considering opening a new caf. He has examined the potential for the company's expansion and determined that the success of the new caf will depend critically on the state of the economy over the next few years. CU Caf has a bond issue outstanding with a face value of $25 million that is due in one year. Covenants associated with this bond issue prohibit the issuance of any additional debt. The restriction means that the expansion will be entirely financed with equity at a cost of $9 million. Jason has summarized his analysis in the following table, which shows the value of the firm in each state of the economy next year, both with and without expansion: Economic Growth Probability Without Expansion $20,000,000 Low 30% With Expansion $24,000,000 $45,000,000 $53,000,000 Normal 50% $34,000,000 $41,000,000 High 20%