You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $35 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.7 million. Investors are willing to provide you with $2.7 million in initial capital in exchange for 25% 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 $1.8 million you need?

c. What is the value of your share of the firm’s equity in cases

(a) and (b)?

AppendixLO1