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You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $26 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.8 million. Investors are willing to provide you with $2.8 million in initial capital in exchange for 30% 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 M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? c. What is the value of your share of the firm's equity in cases (a) and (b)? a. What is the total market value of the firm without leverage? The market value without leverage is $ million. (Round to one decimal place.) b. Suppose you borrow $0.5 million. According to M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? The fraction of the firm's equity will you need to sell is %. (Round to the nearest whole percentage.) c. What is the value of your share of the firm's equity in cases (a) and (b)? The value your share of the firm's equity: Case (a) is $ million. (Round to the nearest whole number.) Case (b) is $ million. (Round to the nearest whole number.)

You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $26 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.8 million. Investors are willing to provide you with $2.8 million in initial capital in exchange for 30% 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 M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? c. What is the value of your share of the firm's equity in cases (a) and (b)? a. What is the total market value of the firm without leverage? The market value without leverage is $ million. (Round to one decimal place.) b. Suppose you borrow $0.5 million. According to M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? The fraction of the firm's equity will you need to sell is %. (Round to the nearest whole percentage.) c. What is the value of your share of the firm's equity in cases (a) and (b)? The value your share of the firm's equity: Case (a) is $ million. (Round to the nearest whole number.) Case (b) is $ million. (Round to the nearest whole number.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 6P
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You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $26 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.8 million. Investors are willing to provide you with $2.8 million in initial capital in exchange for 30% 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 M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? c. What is the value of your share of the firm's equity in cases (a) and (b)? C a. What is the total market value of the firm without leverage? The market value without leverage is $ million. (Round to one decimal place.) b. Suppose you borrow $0.5 million. According to M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? The fraction of the firm's equity will you need to sell is %. (Round to the nearest whole percentage.) c. What is the value of your share of the firm's equity in cases (a) and (b)? The value of your share of the firm's equity: Case (a) is $ million. (Round to the nearest whole number.) Case (b) is $ million. (Round to the nearest whole number.)
Transcribed Image Text:You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $26 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.8 million. Investors are willing to provide you with $2.8 million in initial capital in exchange for 30% 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 M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? c. What is the value of your share of the firm's equity in cases (a) and (b)? C a. What is the total market value of the firm without leverage? The market value without leverage is $ million. (Round to one decimal place.) b. Suppose you borrow $0.5 million. According to M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? The fraction of the firm's equity will you need to sell is %. (Round to the nearest whole percentage.) c. What is the value of your share of the firm's equity in cases (a) and (b)? The value of your share of the firm's equity: Case (a) is $ million. (Round to the nearest whole number.) Case (b) is $ million. (Round to the nearest whole number.)
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