A new startup raises money via a combination of debt and equity. In particular, suppose that to raise the $80 that is needed to make the initial investment, they borrow $30, and raise the other $50 by issuing equity.

a. After they raise the money, what is the market value of the new equity raised? What is the market value of existing shareholders equity? What is the total market value of equity?

b. What ownership stake will the new shareholders require? (Hint: You should obtain that the answer is 26.32%)

c. What will be the cash flow to all equity holders (both existing and new) next year if the economy is in a recession? What will be the cash flow to equity holders if the economy is in a boom? What is the expected cash flow?

d. Repeat part c) but construct only the cash flow to existing shareholders.

e. Use your previous answers to calculate the expected return to equity holders. Show that you obtain the same answer if you calculate the expected return to existing shareholders.

f.What is the debt-to-equity ratio following the financial transaction above?

g. Verify that MM2 holds.