Total market value of the firm without leverage
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C14 P2
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 $2million. 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 friction of the firm's equity will you need to sell to raise the additional $1 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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Solution Summary
The total market value of the firm without leverages are examined. The firm's equity from selling an additional $1 million. The value of a share is determined.
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C14 P2
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 ...
Purchase this Solution
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