The company announces that it is not expanding, what do you think will happen to the price of the bonds? What will happen to the price of the bonds if the company does expand? I believe if the company announces that it is not expanding then the prices of the bonds would not change, however if the company decides to expand then the prices of the bonds would increase due to the increase in the value of the company and the return would be greater. 5. If the company opts not to expand, what are the implications for the companies future borrowing needs? What are the implications if the company does expand?
If the company decides not to expand, I do not believe that the implication for the companies future borrowing needs would differ too much from if they decided to expand. However one variation is if the company decides to expand they will receive more equity as shown above by the calculations. If the company has an increase of equity, they have the opportunity for an increase of borrowing, if they needed. However, if the company opts not to expand, they can still borrow in the future, however, their equity will remain the same, which would give them less variation in regards to borrowing. 6.
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? From my perspective, I do not see an issue with the expansion being financed with equity rather than “cash on hand”. I believe it would be an easier wait to keep track of the finances. I thought the primary reason some companies use equity to finance new projects is because they do not have the “cash on hand” to begin with, and although they have equity, it would be far too much trouble to convert it over to cash. So, they would rather use equity to finance.