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You own your own firm and you need to raise $50 million to fund an expansion. Following the expansion, your firm will be worth $75 million in its unlevered form. You want to go ahead with the expansion, but you are concerned that you may not be able to maintain ownership of over 50% of your firm's equity. In other words, you are concerned that if you use equity to finance the expansion, you may lose control of your firm.
-Assume that capital markets are perfect except for the existence of corporate taxes.Your firm pays 40% of earnings in taxes and you decide to issue $25 million in new debt and $25 million in new equity.You ownership stake in the firm following these new issues of debt and equity is closest to:

Question

Quizplus · Accepted Answer

A) V^U = $75 million V^L = V^U + τ_cD = $75 + .40($25) = $85 million Owner's equity = value - debt - new equity = 85 - 25 - 25 = $35 million Total equity = owners equity + new equity = $35 + $25 = $60 million Owner's stake = 11ea7e60_15e5_e6e9_ba34_5f47b3565b92_TB1624_11 = .5833 or 58.33%

Use the Information for the Question(s) Below