Illustrate what fraction of the firms equity

Reference no: EM1338660

Equity versus Debt Financing

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.

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

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 you need?

C.What is the value of your share of the firm's equity in cases A and B.?

Reference no: EM1338660

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