Case study 2 Capital Budgeting.pdf - Adobe Acrobat Pro File Edit View Window Help Open Create Customize 1 T 12 IN 77,7% Tools Fill & Sign Comment McKenzie Corporation's Capital Budgeting Sam McKenzie is the founder and CEO of McKenzie Restaurants, Inc., a regional company. Sam is considering opening several new restaurants. Sally Thornton, the company's CFO, has been put in charge of the capital budgeting analysis. She has examined the potential for the company's expansion and determined that the success of the new restaurants will depend critically on the state of the economy next year and over the next few years. McKenzie currently has a zero-coupon bond issue outstanding with a face value of $26 million that is due in one year. Sally believes that in the event of default, 20% of the value of McKenzie's assets will be lost in bankruptcy costs "distress cost". Sally has summarized her analysis in the following table, which shows the value of the company in each state of the economy next year, both with and without expansion. Assume the risk-free rate is 5%. Probability Value without Expansion Economic Growth Low 0.3 22,000,000 Value with expansion 29,000,000 37,000,000 54,000,000 Normal 0.5 31,000,000 48,000,000 High 0.2 1. What is the expected value of the company's unlevered equity in one year, with and without the expansion? 2. What is the expected value of the company's debt in one year, with and without the expansion? 3. What is the expected value of the company's levered equity in one year, with and without the expansion? 4. What is the present value of the company's financial distress, with and| without the expansion? 5. Based on your answers in question 4 ONLY, should the company expand and why/why not? Explain. l : lo E ET/-/-