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You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can...

  1. You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $21 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $4.8 million. Investors are willing to provide you with $4.8 million in initial capital in exchange for 40% of the unlevered equity in the firm.
  1. What is the total market value of the firm without leverage?
  2. Suppose you borrow $0.4 million. According to MM, what fraction of the firm’s equity must you sell to raise the additional $4.4 million you need?
  3. What is the value of your share of the firm’s equity in cases (a) and (b)?
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