Assign WK4 - CHAPTER 15 CLOSING CASE BUS 650 Instructor:...

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Unformatted text preview: 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...
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