You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $24 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $5.2 million. Investors are willing to provide you with $5.2 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 $0.6 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)?
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $24 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $5.2 million. Investors are willing to provide you with $5.2 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 $0.6 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)?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for
$24
million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise
$5.2
million. Investors are willing to provide you with
$5.2
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
$0.6
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)?
Expert Solution

This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps

Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you

Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,



Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,



Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,

Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education