Macro & Micro economics Economic Forces Project description 1. The Benly Company needs to raise funds for a major expansion. The company is debating whether to issue stock or to issue bonds. If the company issues bonds, then its debts will in- crease and it will be under additional stress to ensure that its revenues can cover the costs of its debt. If it issues stock, the current owners will lose power and influence. What should the company do? Explain your answer.
Macro & Micro economics Economic Forces
Project description
1. The Benly Company needs to raise funds for a
major expansion. The company is debating
whether to issue stock or to issue bonds. If the
company issues bonds, then its debts will in-
crease and it will be under additional stress to
ensure that its revenues can cover the costs of its
debt. If it issues stock, the current owners will
lose power and influence. What should the
company do? Explain your answer.
5. The marketing director of National Midland
Mortgage has been arguing with senior manage-
ment about building a $50 million publishing
facility.
Other managers worried about the as-
sumptions in the analysis that support the in-
vestment—an increase in the number of
mortgages processed and a reduction in proces-
sing costs. What if the mortgage market did not
grow as expected?
a. Should National Midland invest in the pub-
lishing facility?
b. What assumptions might the marketing direc-
tor have made to make the investment look
worthwhile?
6. Bob Davies must decide whether to invest
$100,000 in his own business or in another local
business. Both investment projects have an ex-
pected life of five years. The cash flow of each is
as follows:
Year Davies Other
1 $20,000 $10,000
2 30,000 10,000
3 40,000 30,000
4 10,000 40,000
5 5,000 50,000
Suppose the risk of the projects is the same and
is accounted for by a risk premium of 6 percent
per year. Would either investment make sense?
Which would be better?
11. Explain what the incentives of bondholders and
stockholders are. Are they the same? How do they differ? Will a firm with no debt act differently than a
firm with a significant amount of debt?
16. In 2010 few firms were investing in new projects
or expanding. Yet, interest rates were extremely
low. Why, with this very low cost of capital
would firms not be investing in new projects?
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