Zymase is the biotechnology start-up firm. Reseacher at Zymase should select one of the three different research strategies. Payoffs (after-tax) and their probability for each strategy are given below. Risk of each project is diversifiable.
Strategy Probability Payoff ($ Million)
A 100% 75
B 50% 140
C 10% 300
A. Determine project which has the highest expected payoff?
B. Assume Zymase has debt of $40 million due at the time of projects payoff. Determine which project has the highest expected payoff for equity holders?
C. Assume Zymase has debt of $110 million due at the time of the project's payoff. Determine which project has the highest expected for equity holders?
D. If management selects strategy which maximizes payoff to equity holders, determine expected agency cost to firm from having $110 million in debt due?
You own your own firm, and you wish to raise $30 million to fund expansion. At presen, you own 100% of the firm's equity, and firm has no debt. To raise $30 million solely through equity, you will require to sell two-thirds of firm. though, you would favour to maintain at least 50% equity stake in firm to retain control.
a. If you borrow $20 million, compute fraction of equity will you require to sell to raise remaining $10 million? (Suppose perfect capital markets)
b. Determine the smallest amount you can borrow to raise $30 million without giving up control? (Suppose perfect capital markets).