Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 14, Problem 2P
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2 million. Investors are willing to provide you with $2 million in initial capital in exchange for 50% of the unlevered equity in the firm.
- a. What is the total market value of the firm without leverage?
- b. Suppose you borrow $1 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $1 million you need?
- c. What is the value of your share of the firm's equity in cases (a) and (b)?
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You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2 million. Investors are willing to provide you with $2 million in initial capital in exchange for 50% of the unlevered equity in the firm. What is the total value of the firm without leverage?
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $28 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.6 million. Investors are willing to provide you with $2.6 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 MM, what fraction of the firm's equity will you need to sell to raise the additional you need?
$2.3 million c. What is the value of your share of the firm's equity in cases a and b?
Consider an entrepreneur who plans to invest in a project that requires an initial
investment of $1,800 this year. The project will generate either $1,600 or $4,200
next year. The cash flows of the project depend on whether the economy is weak or
strong. Both scenarios are equally likely. The risk-free rate is 4% and the risk
premium of the project is 12%. Assume perfect capital markets. Now assume that
the entrepreneur will borrow $400 at 5% interest rate to finance the project. The
cost of equity of the project is closest to:
16.60%
17.72%
18.29%
19.43%
None of the above
Chapter 14 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 14.1 - How does the risk and cost of capital of levered...Ch. 14.2 - Why are investors indifferent to the firms capital...Ch. 14.2 - What is a market value balance sheet?Ch. 14.2 - In a perfect capital market, how will a firms...Ch. 14.3 - How do we compute the weighted average cost of...Ch. 14.3 - With perfect capital markets, as a firm increases...Ch. 14.4 - If a change in leverage raises a firm's earnings...Ch. 14.4 - True or False: When a firm issues equity, it...Ch. 14.5 - Consider the questions facing Dan Harris, CFO of...Ch. 14.5 - Prob. 2CC
Ch. 14 - Consider a project with free cash flows in one...Ch. 14 - You are an entrepreneur starting a biotechnology...Ch. 14 - Acort Industries owns assets that will have an 80%...Ch. 14 - Wolfrum Technology (WT) has no debt. Its assets...Ch. 14 - Suppose there are no taxes. Firm ABC has no debt,...Ch. 14 - Suppose Alpha Industries and Omega Technology have...Ch. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Zetatron is an all-equity firm with 100 million...Ch. 14 - Explain what is wrong with the following argument:...Ch. 14 - Consider the entrepreneur described in Section...Ch. 14 - Hardmon Enterprises is currently an all-equity...Ch. 14 - Suppose Visa Inc. (V) has no debt and an equity...Ch. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Hartford Mining has 50 million shares that are...Ch. 14 - Mercer Corp. has 10 million shares outstanding and...Ch. 14 - In mid-2015 Qualcomm Inc. had 11 billion in debt,...Ch. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Yerba Industries is an all-equity firm whose stock...Ch. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24P
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