McKenzie Corporation Capital Budgeting Coursework

McKenzie Corporation Capital Budgeting - Coursework Example In case there is no expansion, the value of bonds will remain unchanged since it replicates the status of the bond holders which, as well remains unchanged. Provided the expansion of the company occurs, the presence of net value created by expansion (0.2 million), will boost equity leading to decrease in the debt to equity ratio. Intuitively, the company will also be experiencing reduction of the rate of return associated with its bonds. Decrease in the debt to equity ratio and rate of return will trigger increase in value of bonds and their price (Graham et al, 2010). Further, from the calculations above one can also deduce what will happen to the company in case it does not expand; especially, the effects on future borrowing: Without expansion, the equity will remain the same as it is presently. In which case, the expiry of debt convenant next year implies that the company will not have greater equity needed to get financing (borrowing) to be used for expansion. With expansion, the company secures enough equity to finance its expansion, as shown in 0.2 million net value creation. This will trigger more equity next year, thanks to the expansion. Naturally, this places the company in a position where it is able to access more financing required for borrowing needs in the future. The use of cash, rather than equity, in financing the expansion would have made it more productive and efficient because it relieves the company of the costs which may have been spent in changing equity into cash. The use of cash also means that the company would then avoid the time consuming procedure (changing equity to cash) (Graham et al, 2010). Consequently, the expansion would even look better when using cash than when using