McKenzie Corporations Financial Capital Budgeting Essay

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Mckenzie Corporation's Capital Budgeting



Given value of Mckenzie in different scenarios,



Economic Growth



Probability



Without Expansion



With Expansion



Low



$20,000,000



$22,000,000



Normal



$25,000,000



$32,000,000



$43,000,000



$52,000,000



Expected value of the company within one year with Expansion is as follows: =



Formula of E (value of company)



= "P (Low)*V (Low) + P (Normal)*V (Normal) + P (High)*V (High)"



=0.3*22,000,000 +0.5*32,000,000 +0.2*52,000,000



= 6,600,000 + 16,000,000 + 10,400,000



= $33,000,000



= $33 Million.



Expected value of the company within one year without Expansion is as follows:



= P (Low)*V (Low) + P (Normal)*V (Normal) + P (High)*V (High)



= .30*20,000,000 + .50*25,000,000 + .

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20*43,000,000



=6,000,000 + 12,500,000 + 8,600,000



= $27,100,000



= $27.1 Million.



Answer 2)



Company's debt is $25 million.



Thus, the expected value of the company debt without expansion



= .30*25,000,000 + .50*25,000,000 + .20*25,000,000



= $7,500,000 + $12,500,000 + $5,000,000



= $25 million



Thus, the expected value of the company debt will remain the same which is $25 million with expansion since the company is fully funded by the equity, and debt does not change.



Answer 3)



Expected company value without expansion =$27.1 million



Expected company value with expansion =$ 33 million



Thus, a change in expected value of the company due to expansion
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Reference

O'Sullivan, A; Sheffrin, S. M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall.

Ross, S.A., Westerfield, R.W., Jafee, J. (2013). Corporate Finance (10 ed). New York. Mcgraw-Hill Irwin.

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