You are an entrepreneur starting a biotechnology firm. If your research issuccessful, the technology can be sold for $25 million. If your research isunsuccessful, it will be worth nothing. To fund yourresearch, you need to raise $5.5 million. Investors are willing to provide you with $5.5 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 withoutleverage?

b. Suppose you borrow $0.7 million. According toMM, what fraction of thefirm's equity will you need to sell to raise the additional $4.8 million youneed?

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