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Assign WK4 - BUS650 Instructor Sarakatsanis...

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CHAPTER 15 CLOSING CASE BUS 650 Instructor:  Sarakatsanis 10/24/11 Economic Growth Probability Without Expansion WithExpansion Low 0.3  $11,000,000   $13,000,000  Normal 0.5  $17,500,000   $24,000,000  High 0.2  $22,500,000   $28,500,000  Assignment: Without Expansion With Expansion Expected value  $16,550,000   $21,600,000  Answer: The company's shareholders would be better off with expansion as the expected value with expansion is higher. 2. What is the expected value of the company's debt in one year, with and without the expansion?  Expected value of debt = Expected Value of Min(value of the company, Outstanding Bonds face value) Answer: With Expansion Without Expansion Expected value of debt  $13,100,000   $13,700,000  3. One year from now, how much value creation is expected from the expansion? How much value is expected for stockholder? Bondholders?  Answer: Value created from expansion = Change in value of the company due to expansion Value created from expansion  $5,050,000  Net Value created by expansion = Value created from expansion - Investment needed for expansion Net Value created by expansion   $550,000  Value creation from expansion would be the difference with and without expansion for respective type of investors. 
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