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:

Tacit-knowledge

Unwritten, unspoken, and hidden vast store of knowledge gained through experience, which is hard to transfer to another person by writing it down or verbalizing it.

Deductive Reasoning

Type of logical reasoning that moves from a general premise about a class to a conclusion about a particular member or members of the class.

Fluid Intelligence

The ability to use reasoning and solve new problems without relying on knowledge previously gained.

Reorganizing Stage

A phase in various processes (e.g., psychological development, corporate restructuring) where existing structures or strategies are revised and restructured.