You are the founder of GeneTech Solutions AG – a start-up bi…
You are the founder of GeneTech Solutions AG – a start-up biopharma company that focuses on developing gene therapies for rare genetic diseases. You successfully launched an IPO and the company is now traded in the stock market. Congratulations! The total amount of all stocks (equity) is €8 million. Furthermore, you have a bank loan of €2 million. Your leverage ratio (= share of debt to total capital) is therefore 20%. The equity beta of your firm is 1.16. You want to expand and need an additional amount of €1.5 million to finance this expansion. You can do this by issuing stock (option A) or taking up a bank loan (option B). QUESTION: Interest payments are fully tax-deductible and the current corporate income tax rate is 35%. Does this fact shape your preference for one of the two financing options? Briefly explain using the concepts we have seen in class.