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
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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)?
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