Use the Information for the Question(s) Below

question 102

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 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:

• A) 58%
• B) 55%
• C) 33%
• D) 50%

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Definitions:

Confidence Interval

A range of values, derived from sample statistics, that is likely to contain the value of an unknown population parameter at a specified confidence level.

Population Mean

The mean value of all the elements within a population.

Sample Size

The number of observations or data points used in a study or experiment.

Confidence Level

The probability with which a statistical estimate can be expected to contain the true parameter value.