Reference no: EM132554818
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: $151 ?million, $131 ?million, $99 ?million, and $76 million. These outcomes are all equally? likely, and this risk is diversifiable. Suppose the? risk-free interest rate is 5% and? that, in the event of? default, 24% of the value of? Gladstone's assets will be lost to bankruptcy costs.? (Ignore all other market? imperfections, such as? taxes.)
a. What is the initial value of? Gladstone's equity without? leverage?
The initial value of? Gladstone's equity without leverage is ?$..................... million. ?(Round to two decimal? places.)
Now suppose Gladstone has? zero-coupon debt with a $100 million face value due next year.
b. What is the initial value of? Gladstone's debt?
The initial value of? Gladstone's debt is ?$.................million. ? (Round to two decimal? places.)
c. What is the? yield-to-maturity of the? debt? What is its expected? return?
The? yield-to-maturity is .....................?%. ? (Round to two decimal? places.)
The expected return is ...................?%. ?(Round to the nearest? integer.)
d. What is the initial value of? Gladstone's equity?
The initial value of? Gladstone's equity with leverage is ?$................... million. ? (Round to two decimal? places.)
What is? Gladstone's total value with? leverage?
?Gladstone's total value with leverage is ?$....................million. ?(Round to two decimal? places.)
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?
If Gladstone does not issue? debt, the price is ?$....................per share. ?(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?
If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchase? shares, the price is ?$.................per share. ?(Round to the nearest? cent.)
Why does your answer differ from that in part ?(e?)? ?(Select the best choice? below.)
A.The risk free rate lowers the share price.
B.Bankruptcy costs raise the share price.
C.Bankruptcy costs lower the share price.
D.The risk free rate raises the share price.