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What is the initial value of gladstone debt

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Gladstone Corporation is about to launch a ne w product. Depending on the success of the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95 million, and $80 million. These outcomes are all equally likely, and this risk is diversifiable.

Gladstone will not make any payouts to investors during the year. Suppose the risk-free interest rate is 5% and assume perfect capital markets.

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?

Reference no: EM132516453

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