Gladstone Corporation is about to launch a new product. Depending on the success of the new?...

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Finance

Gladstone Corporation is about to launch a new product.Depending on the success of the new? product, Gladstone may haveone of four values next? year: $146 ?million, $138 ?million, $92?million, and $81 million. These outcomes are all equally? likely,and this risk is diversifiable. Suppose the? risk-free interestrate is 5% and? that, in the event of? default, 28% of the valueof? Gladstone's assets will be lost to bankruptcy costs.? (Ignoreall 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 $100million 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 itsexpected? 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 debtat the start of the year.
e. If Gladstone does not issue? debt, what is its share?price?
f. If Gladstone issues debt of $100 million due next year anduses the proceeds to repurchase? shares, what will its share price?be? Why does your answer differ from that in part ?(e?)?

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4.2 Ratings (539 Votes)

a Initial value of equity without leverage average of all possible equity values discounted at 5 for 1 year 146 138 92 814115 11425105 10881 million value of equity without leverage b If the company has zerocoupon debt with a face value FV of 100 See Answer

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Gladstone Corporation is about to launch a new product.Depending on the success of the new? product, Gladstone may haveone of four values next? year: $146 ?million, $138 ?million, $92?million, and $81 million. These outcomes are all equally? likely,and this risk is diversifiable. Suppose the? risk-free interestrate is 5% and? that, in the event of? default, 28% of the valueof? Gladstone's assets will be lost to bankruptcy costs.? (Ignoreall 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 $100million 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 itsexpected? 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 debtat the start of the year.e. If Gladstone does not issue? debt, what is its share?price?f. If Gladstone issues debt of $100 million due next year anduses the proceeds to repurchase? shares, what will its share price?be? Why does your answer differ from that in part ?(e?)?