1. You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $32 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $5.8 million. Investors are willing to provide you with $5.8 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 $0.4 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional

$5.4 million you need?

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

2. Adelphi Industries owns assets that will have a(n) 75% probability of having a market value of $47 million in one year. There is a 25% chance that the assets will be worth only $17 million. The current risk-free rate is 12%, and Adelphi's assets have a cost of capital of 24%.

a. If Adelphi is unlevered, what is the current market value of its equity?

b. Suppose instead that Adelphi has debt with a face value of $14 million due in one year. According to MM, what is the value of Acort's equity in this case?

c. What is the expected return of Adelphi's equity without leverage? What is the expected return of Adelphi's equity with leverage?

d. What is the lowest possible realised return of Adelphi's equity with and without leverage?