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In: Finance

You are an entrepreneur starting a biotechnology firm. If your research is​ successful, the technology can...

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 $3.8 million. Investors are willing to provide you with $3.8 million in initial capital in exchange for 40% of the unlevered equity in the firm.

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

b.Suppose you borrow $0.8 million. According to​ MM, what fraction of the​ firm's equity will you need to sell to raise the additional $3.0 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

​$nothing

million.  ​(Round to one decimal​ place.)

b.

Suppose you borrow

$ 0.8$0.8

million. According to​ MM, what fraction of the​ firm's equity will you need to sell to raise the additional

$ 3.0$3.0

million you​ need?The fraction of the​ firm's equity you will need to sell is

nothing​%.

​(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

​$nothing

million.  ​(Round to one decimal​ place.)Case

​(b​)

is

​$nothing

million.  ​(Round to one decimal​ place.)

Solutions

Expert Solution

jeff jeffy answered 5 months ago
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