You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $ 30$30 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.02.0 million. Investors are willing to provide you with $2.02.0 million in initial capital in exchange for 50 %50% of the unlevered equity in the firm. a. What is the total market value of the firm without leverage? b. Suppose you borrow $1.01.0 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $1.01.0 million you need? c. What is the value of your share of the firm's equity in cases (a) and (b)? a. What is the total market value of the firm without leverage?

b. Suppose you borrow $1.0 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $1.0 million you need?

= 33.33%

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

a) = $4 x 50% = $2 million
b) = $2 million

Explanation:

if successful price = $30 million

if unsuccessful price = $0

investment required = $2 million

in exchange of 50% of the firm

if you borrow $1 million, you will have to give up 33.33% of the company in exchange for the other $1 million needed

= $1 / ($4 - $1) = $1 / $3 = 33%

according to Modigliani and Miller (MM), the value of a firm is determined by its profit.