Question
McKENZIE CORPORATIONS CAPITAL BUDGETING Sam McKenzie is the founder and CEO of McKenzie Restaurants, Inc., a regional company. Sam is considering opening several new restaurants.
McKENZIE CORPORATIONS CAPITAL BUDGETING
Sam McKenzie is the founder and CEO of McKenzie Restaurants, Inc., a regional company. Sam is considering opening several new restaurants. Sally Thornton, the companys CFO, has been put in charge of the capital budgeting analysis. She has examined the potential for the companys expansion and determined that the success of the new restaurants will depend critically on the state of the economy over the next few years.
McKenzie currently 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. This restriction means that the expansion will be entirely financed with equity at a cost of $5.7 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:
6. Because of the bond covenant, the expansion would have to be financed with equity. How would it affect your answer if the expansion were financed with cash on hand instead of new equity?
I need the full explaination thanks
Economic Growth Without Expansion Probability With Expansion .30 Low Normal High .50 .20 $20,000,000 25,000,000 43,000,000 $22,000,000 32,000,000 52,000,000Step by Step Solution
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