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%

---

Definitions:

Prediction

The act of forecasting or estimating a future event or outcome based on current data or trends.

Explanation

The act of making something clear or understandable by describing details or reasons.

Indication

A signal or symptom that suggests the presence of a condition, disease, or need for treatment.

Influence

The capacity to have an effect on the character, development, or behavior of someone or something, or the effect itself.