Use the Information for the Question(s) Below

question 33

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 and that your firm pays 40% of earnings in taxes.If you want to maintain ownership of at least 50% of your firm,then the minimum amount of debt that you must issue to fund the expansion is closest to:

• A) $19 million
• B) $18 million
• C) $16 million
• D) $20 million

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Definitions:

Self-Efficacy

The assurance a person holds in their skill to enact behaviors aimed at realizing specific goals.

Reciprocal Determinism

A concept in social psychology proposing that individual behavior, personal factors, and environmental influences interact and influence each other.

Social-Cognitive Perspective

A psychological framework focusing on how people learn by observing others, and how cognitive processes are involved in social behavior.

Spotlight Effect

The assumption that others are scrutinizing one's behavior and looks more intensely than they actually are.