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ASSIGNMENT’ TITLE: CLOSING CASE CHAPTER 15

STUDENT’S NAME: RAFAEL NOVA

COURSE’S TITLE: BUS 650, MANAGERIAL FINANCE

INSTRUCTOR’S NAME: WENDY ACHILLES

SUBMITION’S DATE: FEB 06’ 2012

1) What is the expected value of the company in one year, with and without expansion? Would the company’s stockholders be better off with or without expansion? Why?
= 0.3 x 11,000,000 + 0.5 x 17,500,000 + 0.2 x 22,500,000 = $ 3,300,000 + $ 8,750,000 + $ 4,500,000 = $ 16,550,000
b) expected value with expansion:
= 0.3 x 13,000,000 + 0.5 x 24,000,000 + 0.2 x 28,500,000 = $ 3,900,000 + $ 12,000,000 + $ 5,700,000 = $ 21,600,000.
So, $ 21,600,000 - $ 4,500,000 = $ 17,100,000.
They would be better off with the expansion because they would be making $ 550,000 more with it, so, $ 17,100,000 - $ 16,550,000 = $ 550,000.
2) What is the expected value of the company’s debt in one year, with and without the expansion?
The expected value of debt will be the same amount because the expansion would be financed with equity.
3) One year from now, how much value creation is expected from the expansion? How much value is expected for stockholders? bondholders?
A) Expected value without expansion:
= 0.3 x $ 11,000,000 + $ 0.5 x $ 17,500,000 + 0.2 x $ 22,500,000 = $ 16,550,000.
B) Expected value with expansion:
= 0.3 x 13,000,000 + 0.5 x 24,000,000 + 0.2 x 28,500,000 = $ 21,600,000
So, cost of financing will be $ 21,600,000 - $ 4,500,000 = $ 17,100,000.
Net value created by expansion:
= $ 17,100,000 - $ 16,550,000 = $ 550,000.
Since the debt value would remain the same, then, the addition would be for the stockholders.
Expected value for stockholders = $ 550,000, and for bondholders = $ 0.
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

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