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CBEB3104

Individual report: Mini case

(McKENZIE CORPORATION’S CAPITAL BUDGETING)

Name: amna Mohamed ali yusuf almezaal

Matric number: SER090706

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?

E(expansion) = ∑ ( probability × value of the company)

E(without expansion) = (0.3×30,000,000) + (0.5×35,000,000) + (0.2×51,000,000)

= $ 36,700,000

E(with expansion) = (0.3×33,000,000) + (0.5×46,000,000) + (0.2×64,000,000)

= $ 45,700,000 – $ 8,400,000 ($ 8.4 million financing cost) = $ 37,300,000

ஃ expansion is a better option for the shareholder’s since the value of expansion ($37,300,000) is $ 600,000 dollars higher than the value without expansion ($36,700,000)

2. What is the expected value of the company’s debt in one year, with and without the expansion?

- value of debt without expansion = (0.3× 30,000,000) +(0.5× 34,000,000) + (0.2×34,000,000) = $32,800,000

- value of debt with expansion = (0.3× 33,000,000) + (0.5× 34,000,000) +(0.2×34,000,000) = $33,700,000

OR

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?

- From question one, the value creation from expansion = $600,000

- Expected value for stockholders :

Value of equity without expansion = (0.3× 0) + (0.5× (35m-34m)) + (0.2×(51m-34m)) = $3,900,000

Value of equity with expansion = (0.3× 0) + (0.5×(36m-34m)) + (0.2×(64m-34m)) = $12,000,000 ஃ expected value for stockholders = 12,000,000 -3,900,000 = $8,100,000

- Expected value for bondholders = 33,700,000 – 32,800,00 = $900,000

4. If the company announces that it is not