Problem
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $23 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $4.5 million. Investors are willing to provide you with $4.5 million in initial capital in exchange for 30% of the unlevered equity in the firm.
I. What is the total market value of the firm without leverage?
II. Suppose you borrow $0.7 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $3.8 million you need?
III. What is the value of your share of the firm's equity in cases (I) and (II)?