Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134202648
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 14, Problem 2P

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 million. Investors are willing to provide you with $2 million in initial capital in exchange for 50% of the unlevered equity in the firm.

  1. a. What is the total market value of the firm without leverage?
  2. b. Suppose you borrow $1 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $1 million you need?
  3. c. What is the value of your share of the firm's equity in cases (a) and (b)?
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Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)

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