Use the information for the question(s) below.

You own your own firm and you need to raise $50 million to fund an expansion. Following the expansion, your firm will be worth $75 million in its unlevered form. You want to go ahead with the expansion, but you are concerned that you may not be able to maintain ownership of over 50% of your firm's equity. In other words, you are concerned that if you use equity to finance the expansion, you may lose control of your firm.

5) Assume that capital markets are perfect, you issue $30 million in new debt, and you issue $20 million in new equity. Your ownership stake in the firm following these new issues of debt and equity is closest to:

A) 58%

B) 50%

C) 33%

D) 55%

Answer: Explanation:

6) Assume that capital markets are perfect, you issue $25 million in new debt, and you issue $25 million in new equity. Your ownership stake in the firm following these new issues of debt and equity is closest to:

A) 50%

B) 55%

C) 58%

D) 33%

Answer: Explanation:

7) Assume that capital markets are perfect except for the existence of corporate taxes. Your firm pays 40% of earnings in taxes and you decide to issue $25 million in new debt and $25 million in new equity. Your ownership stake in the firm following these new issues of debt and equity is closest to:

A) 58%

B) 55%

C) 33%

D) 50%

Answer: Explanation:

8) Assume that capital markets are perfect except for the existence of corporate taxes and that your firm pays 40% of earnings in taxes. If you want to maintain ownership of at least 50% of your firm, then the minimum amount of debt that you must issue to fund the expansion is closest to:

A) $19 million

B) $18 million

C) $16 million

D) $20 million

Answer: Explanation:

9) Assume that capital markets are perfect except for the existence of corporate taxes and that your firm pays 35% of earnings in taxes. If you want to maintain ownership of at least 50% of your firm, then calculate the minimum amount of debt that you must issue to fund the expansion.

Answer Explanation: