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 $ 5.3 million. Investors are willing to provide you with $ 5.3 million in initial capital in exchange for 45 % of the unlevered equity in the firm. a. What is the total market value of the firm without​ leverage? b. Suppose you borrow $ 0.5 million. According to​ MM, what fraction of the​ firm's equity will you need to sell to raise the additional $ 4.8 million you​ need? c. What is the value of your share of the​ firm's equity in cases a and b​?

Answer 1

Investor's Investment$5.30 million Share in Equity 45% Therefore, Market Value of Firm 5.30/0.45 $11.78 million Firm borrowed $0.50 million Total Requirement- -$0.50 $4.80 Borrowed Required to be raised Firm's Equity (11.78-0.50) - $11.28 % of firm's equity to be sold-4.80/11.28 42.56% с. Value of own share in firm's equit $11.78 x 55% -$6.48 million in case A. 55% - $11.28 x (1-0.4256) -$6.48 million in case B 57.44%