You own a firm, and you want to raise $ 40 million to fund an expansion. Current

Question

You own a firm, and you want to raise $ 40 million to fund an expansion. Currently, you own 100% of the firm's equity, and the firm has no debt. To raise the $ 40 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 $ 15 million, what fraction of the equity will you need to sell to raise the remaining $ 25 million? (Assume perfect capital markets.) b. What is the smallest amount you can borrow to raise the $ 40 million without giving up control? (Assume perfect capital markets.) a. If you borrow $ 15 million, what fraction of the equity will you need to sell to raise the remaining $ 25 million? (Assume perfect capital markets.) If you borrow $ 15 million, to raise the remaining $ 25 million you will need to sell nothing % of the equity.(Round to one decimal place.)

Explanation / Answer

To raise $40 million stake to be sold=2/3 of value of the fimr.

So, the value of the firm=$40 million*3/2

=$60 million.

Answer for question no.a:

If $15 is borrowed, additional funds still needed=$40-$15=$25.

If $25 million is to be sold, then holding to be sold=$25 million/$60 million.

=41.7%.

Answer for question no.b:

Smallest amount that can be borrowed without giving up control is any amount that is less than 50% of $60 million ie., $30 million.

So, $40 million is required and out of this $30 million is raised through equity and the balance is to be raised through borrowing ie.,,$40-$30 =$10 million.

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