Question

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)?

Answer 1

I have answered the question below

Please up vote for the same and thanks!!!

Do reach out in the comments for any queries

Answer:

A). Total market value of the firm without​ leverage
	4.8/40*100=
	12	millions
B.)
Unlevered Value(Total value of Firm remains unchanged as per MM Hypothesis)	12
Less:Borrowings(Debt)	0.4
So, Bal.equity	11.6
So,we need to sell(to raise the balance of 4.4 Mln.)	4.4/11.6=
	37.93%
	of the firm's equity
C).The value of   Entrepreneur's share of the​ firm's equity in cases ​(a​) and​(b​)
a. (100-40)= 60%*12 million=	7.2	Mln.
b.(100-37.93)= 62.07%*11.6 million =	7.2	Mln.