Q.No.1: You are an entrepreneur with a creative idea in hotel industry and want to launch this idea. If your idea is a success, the hotel business can be sold for $50 million. If your idea is a flop, it will be worth nothing. To finance your idea, you are in need of $5 million. A venture capitalist(VC) is willing to provide you with $5 million in initial capital in exchange for 50% of the unlevered equity in the firm.

a. What is the total worth (market value) of the company without borrowing (leverage)? (2 marks)

b. Suppose you borrowed $2.5 million from the Bank. According to Modigliani and Miller, what fraction of the firms equity will you need to sell to raise the additional $2.5 million you need? (3 marks)

c. What is the share price of the companys equity in cases (a) and (b)? (2 marks)