You are an entrepreneur starting a biotechnology firm. If your research is succe

Question

You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $34 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $3.7 million. Investors are willing to provide you with $3.7 million in initial capital in exchange for 45% of the unlevered equity in the firm.

a. What is the total market value of the firm without leverage?

b. Suppose you borrow $0.9 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $2.8 million you need?

c. What is the value of your share of the firm's equity in cases (a) and (b)?

Explanation / Answer

a.

45% is equivalent to $3.7 million

so 100% is equivalent to 3.7/45*100 = $8.22 million

b.

$8.22 million is equivalent to 100% equity

so $2,8 million is equivalent to = 100*2.8/8.22 = 34%

c.

value of founder share in case a - 8.22 - 3.70 = $4.52 million (55% equity)

value of founder share in case b - 8.22 - 2,8 = $5.42 million (66% equity)

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.