Case Study: Capital Structure

Anonymous
timer Asked: Jun 29th, 2018
account_balance_wallet $25

Question description

Part 1: Case Background
MarCher Industries is considering undertaking a new project with a one-year life with the following expected return scenarios.

Scenario 1 HIGH-RISK PROJECT Scenario 2 LOW-RISK PROJECT
Cash flow (boom) $1,500,000 $1,000,000
Cash flow (bust) $400,000 $500,000

The company currently has no debt, but is considering borrowing $870,000 on a short-term basis to help finance its purchase of the project. The company will owe $900,000, including principal and interest, in one year. There is 60% chance a boom will occur, and only 40% chance a bust will occur.

Part 2: Case Analysis

1) Calculate the expected value of the high- and low-risk projects to MarCher Industry’s stockholders if the company remains unlevered. Which project would the stockholders prefer?

2) Calculate the expected value of the high- and low-risk projects to MarCher’s stockholders and bondholders, assuming the company does borrow money to partially finance the purchase of the project. Which project would the bondholders prefer? Which project would the stockholders prefer?

3) Explain why a conflict exists between the bondholders and the stockholders.

Part 3: Case Paper

Submit a written report that that responds to questions 1–3 (include all calculations as attachments or exhibits). The report should be is 1–2 pages in length, well written with introductory and concluding paragraphs, formatted as follows: double-spaced, one-inch margins, using a 12-point Times New Roman font. References must be appropriately cited as per the APA (6th Edition) citation guidelines. Include a complete bibliography.

Tutor Answer

Chancellor_Ivy
School: Boston College

...

flag Report DMCA
Review

Anonymous
Totally impressed with results!! :-)

Similar Questions
Hot Questions
Related Tags

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors