Mckenzie Corporation's Capital Budget. If the company announces that it is not expanding, what do you think will happen to the price of its bonds?
Unless there is a risk of bond default as a result of expansion, there should be no effect on bond price since it is only determined by the interest rate and term of the bond, and its rating.
If the company were borrowing by taking on additional debt, its bond rating could fall and the price would fall.
Dear sherill,
In term of McKenzie case study from the corporate fiance by Ross . Do you have the answers to the remaning questions ?
If the company opts ( choose) not to expand, what is the implication for the company's future borrowing needs? What are the implications if company does expand?
To analyze the potential impact of a company announcing that it is not expanding on the price of its bonds, you should consider several factors:
1. Interest rates: If the company decides not to expand due to uncertain economic conditions or industry-specific challenges, it may reflect a cautious approach. In such cases, the central bank or market forces could lower interest rates to stimulate economic growth. Lower interest rates reduce bond yields, making existing bonds more attractive and potentially increasing their prices.
2. Company's creditworthiness: When a company decides not to expand, it might imply a conservative financial position and a focus on maintaining financial stability. This could positively impact the company's creditworthiness. A higher credit rating means lower risk for investors, potentially leading to increased demand for the company's bonds and raising their prices.
3. Market sentiment: The market's expectations and sentiment towards the company can influence the price of its bonds. If the decision not to expand is perceived as negative or indicative of underlying financial problems, it could lead to a decrease in demand for the company's bonds and a decline in their prices.
To accurately determine the impact on the price of McKenzie Corporation's bonds, you should monitor the company's credit rating, interest rate movements, and market sentiment. Additionally, analyzing other factors like the company's financial health, competition, and industry conditions would provide a more comprehensive understanding of how the bond market might respond.