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:

Incentive Factors

Elements or conditions that motivate or encourage individuals to perform specific actions or behaviors.

Central Nervous System

Comprises the brain and spinal cord, responsible for processing information and controlling most functions of the body and mind.

Rescorla

A reference to Robert A. Rescorla, a psychologist known for his work with Pavlovian conditioning, particularly concerning the role of cognitive processes in classical conditioning.

Electrical Stimulation

The use of electrical currents to stimulate nerves or brain regions for therapeutic purposes or in research to understand neural function.