question archive You are an entrepreneur starting a biotechnology firm
Subject:FinancePrice: Bought3
You are an entrepreneur starting a biotechnology firm. If your research
is successful, the technology can be sold for $25 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $4 million.
a)Investors are willing to provide you with the capital in exchange for 45% of the unlevered equity in the firm. What is the total market value of the firm without leverage?
b)Suppose instead of funding 100% from equity investors, you have borrowed $2 million. According to MM, what fraction of the firm's equity will you need to sell to raise the capital you need?
c) What is the value of your share of the firm's equity in cases (a) and (b)? Remember to provide an explanation for your answer.