You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for

$27 million.

If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise

$5.1

million. Investors are willing to provide you with

$5.1

million in initial capital in exchange for

30%

of the unlevered equity in the firm.

a. What is the total market value of the firm without leverage?

b.

Suppose you borrow

$0.3

million. According to M&M, what fraction of the firm's equity will you need to sell to raise the additional

$4.8

million you need?c. What is the value of your share of the firm's equity in cases

(a)

and

(b)?