What Is The Expected Value Of The Company In One Year, With And Without Expansion?

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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? The expected value is equal to the probability times the value (Ross et. al, 2011). In this case, we have three possible values, so the weighted average is .3*11m + .5*17m + .2*22.5m=16.3 million USD WITHOUT EXPANSION or; .3*13m + .5*24m + .2*28.5m=21.6 million USD WITH expansion. The difference between the two options expansion and no expansion is 5.3 million; expansion earns 5.3m. Therefore, if expansion costs only 4.5m, it would be beneficial to the stockholders. This calculation has been performenced considering a one year period. 2. What is the expected value of the company's debt in one year, with and without the expansion? The debt owed is 14m USD regardless of the activities of the company. 3. One year from now, how much value creation is expected from the expansion? How much value is expected for stockholders? Bondholders? The value created will be the difference between the expansion cost and the expansion benefits in USD, which amounts to 5.3-4.5=.8m; this is how much the shareholders will get. Bondholders should receive the value of the bonds, which is 14m irrespective of the value creation. 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? The bond is in

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