Gladstone Corporation is about to launch a new product. Depending on the success of the new? product, Gladstone may have one of four values next? year: $155 million, $139 million, $95 million, and $81 million. These outcomes are all equally? likely, and this risk is diversifiable. Suppose the? risk-free interest rate is
5% and? that, in the event of? default, 27% of the value of? Gladstone's assets will be lost to bankruptcy costs.? (Ignore all other market? imperfections, such as? taxes.)
a. What is the initial value of? Gladstone's equity without? leverage?
Now suppose Gladstone has? zero-coupon debt with a $100 million face value due next year.
b. What is the initial value of? Gladstone's debt?
c. What is the? yield-to-maturity of the? debt? What is its expected? return?
d. What is the initial value of? Gladstone's equity? What is? Gladstone's total value with? leverage?
Suppose Gladstone has 10 million shares outstanding and no debt at the start of the year.
e. If Gladstone does not issue? debt, what is its share? price?
f. If Gladstone issues debt of $ 100million due next year and uses the proceeds to repurchase? shares, what will its share price? be? Why does your answer differ from that in part (e?)?