Question

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

$33

million. If your research is​ unsuccessful, it will be worth nothing. To fund your​ research, you need to raise

$4.9

million. Investors are willing to provide you with

$4.9

million in initial capital in exchange for

40%

of the unlevered equity in the firm.

a. What is the total market value of the firm without​ leverage?

b.

Suppose you borrow

$0.3

million. According to​ MM, what fraction of the​ firm's equity will you need to sell to raise the additional

$4.6

million you​ need?

c. What is the value of your share of the​ firm's equity in cases

​(a​)

and

​(b​)?

Answer 1

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