Fund Expansion Through Equity
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You own your own firm, and you want to raise $30 million to fund an expansion. Currently, you own 100% of the firm's equality, and the firm has no debt. To raise the $30 million solely through equity, you will need to sell two-thirds of the firm. However, you would prefer to maintain at least a 50% equity stake in the firm to retain control.
a. If you borrow $20 million, what fraction of the equity will you need to sell to raise the remaining $10 million? Assume perfect capital markets.
b. What is the smallest amount you can borrow to raise the $30 million without giving up control? Assume perfect capital markets.
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this solution discusses fund expansion through equity.
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The first thing we must do is determine the value of the firm's equity. The problem states that selling 2/3rd's of the firm's equity would raise the full $30 million. So, the full value of all equity is $30,000,000/(2/3)=$45,000,000.
a. Part a is essentially asking what percent of the total equity is $10,000,000. If total equity is $45,000,000; then ...
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