Samur Inc.
Essay Preview: Samur Inc.
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Sam Murad is the founder and CEO of Samur Restaurants, Inc., a regional company. Sam is considering opening several new restaurants. You, the companys CFO, have been put in charge of the capital budgeting analysis. You have examined the potential for the companys expansion and determined that the success of the new restaurants will depend critically on the state of the economy over the next few years.
The company currently has a bond issue outstanding with a face value of RM34 million that is due in one year. Covenants associated with this bond issue prohibit the issuance of any additional debt. This restriction means that the expansion will be entirely financed with equity at a cost of RM8.4 million. You have summarized your 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:
Economic growth
Probability
Without expansion
With expansion
RM30,000,000
RM33,000,000
Normal
35,000,000
46,000,000
51,000,000
64,000,000
Now, prepare your full report for Sam, and use the questions below as your guidance (use the format given in case 1).
What is the expected value of the company in one year, with and without expansion? Would the companys stockholders be better off with or without expansion? Why?
What is the expected value of the companys debt in one year, with or without expansion?
One year from now, how much value creation is expected from the expansion? How much value is expected for stockholders? Bondholders?
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?
If the company opts not to expand, what are the implications for the companys future borrowing needs? What are the implications if the company does expand?
Because of the bond covenant, the expansion would have to be financed with equity. How would it affect your answer if the expansion were financed with cash on hand instead of new equity?