You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $21 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $4.8 million. Investors are willing to provide you with $4.8 million in initial capital in exchange for 40% of the unlevered equity in the firm.

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

b. Suppose you borrow $0.4 million. According to MM, what fraction of the firm’s equity must you sell to raise the additional $4.4 million you need?

c. What is the value of your share of the firm’s equity in cases

(a) and (b)?