# CorporateFinanceChapter17McKenzieCaseStudy

## CorporateFinanceChapter17McKenzieCaseStudy

Chapter 17 - McKenzie Corporation's Capital Budgeting

Economic Growth Probability Without Expansion With Expansion Bond Issue Face Value \$29,000,000
Low 0.3 \$25,000,000 \$27,000,000 Expansion Equity \$5,700,000
Normal 0.5 \$30,000,000 \$37,000,000
High 0.2 \$48,000,000 \$57,000,000

1) Expected Value without expansion: \$32,100,000
Expected Value with expansion: \$38,000,000
\$32,300,000
Gain \$200,000

At a gain of \$200000, the company stockholder's would be better off with expansion.

2) W/A Withough Expansion W/A With Expansion
Low \$7,500,000 \$8,100,000
Normal \$14,500,000 \$14,500,000
High \$5,800,000 \$5,800,000
\$27,800,000 \$28,400,000

4)
If the compnay expands:
The increased equity would cause a decrease in the debt to equity ratio. The value price of the bonds will increase in value and company bonds rate of return will go down.

If the company does not expand:
The value of the bonds will be unchanged.

Chapter 9Stock Valuation at Ragan Engines
Question 1
Earnings per share 5.35
Return on Equity 21%
Required Return 18%
Number of Shares 300000
Divident per share = 640000 / 300000 2.13

Net income = EPS * # of Shares
= 5.35 * 300000
1605000

Annual Growth Rate:
g = RR * ROE
= 1- (640,000 / 1605000) * .25
= (1 - .40) * .25
= .6 * .25
0.15
15%

Value per Share:
P0 = Div / R - g
= D (1 + g) / R - g
=2.13 (1 + .15) / .18 - .15
= 2.4495 / .03
81.65

Question 6 - how to increase the price of stock?
Stock is valued by discounting its dividends. To increase the price of stock, increase the dividends.
Dividends could be increased by reducing retained earnings, but this is a risk because firms retain earnings to create future dividends.