You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $50 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $9 million. Investors are willing to provide you with a $9 million in the initial capital in exchange for 75% of the unlevered equity in the firm. (Show your calculations)
a. What is the total market value of the firm without leverage?
b. Suppose you borrow $3 million, according to M&M, what fraction of the firm’s equity will you need to sell to raise the additional $6 million you need?
c. What is the value of your share of the firm’s equity in cases a) and b)?