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: $ 153 million, $ 139 million, $ 95 million, and $ 79 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, 30 % 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. round to two decimal place
b. What is the initial value of Gladstone's debt? round to two decimal place
c. What is the yield-to-maturity of the debt %? round to two decimal place .
What is its expected return % ? round to the nearest integer
d. What is the initial value of Gladstone's equity? round to two decimal place
What is Gladstone's total value with leverage? round to two decimal place
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? round to the nearest cent
f. If Gladstone issues debt of $ 100 million due next year and uses the proceeds to repurchase shares, what will its share price be round to nearest cent
Why does your answer differ from that in part (e)?