Use the Information for the Question(s)below

question 26

Multiple Choice

Use the information for the question(s) below.
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,you issue $30 million in new debt,and you issue $20 million in new equity.Your ownership stake in the firm following these new issues of debt and equity is closest to:

• A)58%.
• B)50%.
• C)33%.
• D)55%.

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Definitions:

Personal Experience

refers to events or encounters an individual personally goes through, shaping their perception and understanding of the world.

Primacy Effect

The Primacy Effect is a cognitive bias that results in a person recalling information presented at the beginning of a list better than information in the middle or end.

Phi Phenomenon

An optical illusion of perceiving a series of still images, when viewed in rapid succession, as continuous motion.

Halo Effect

The tendency to form an overall positive impression of a person based on one positive characteristic.