Mathematics, 25.03.2020 18:27 secondcolinmills005

You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.0 million. Investors are willing to provide you with $2.0 million in initial capital in exchange for 50%

of the unlevered equity in the firm.

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

b. Suppose you borrow $1.0 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $1.0

million you need?

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

(a)

and

(b)?

Answers: 3

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