{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

W8 Chapter 14 Problems

W8 Chapter 14 Problems - Please complete problems 2 4 14...

This preview shows pages 1–2. Sign up to view the full content.

Please complete problems 2, 4 & 14 for chapter 14. 1. 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? Total value of equity:2*\$2m=\$4m 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 million you need? MM says total value of firm is still \$4 million. \$1 million of debt implies total value of equity is \$3 million. Therefore, 33% of equity must be sold to raise \$1 million. c) What is the value of your share of the firm’s equity in cases (a) and (b)? In (a), 50% × \$4m = \$2m. In (b), 2/3 × \$3m = \$2m. Thus, in a perfect market the choice of capital structure does not affect the value to the entrepreneur.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern