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What is the initial value of gladstone equity

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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: $154 million, $136 million, $94 million, and $80 million. These outcomes are all equally likely, and this risk is diversifiable. Gladstone will not make any payouts toinvestors during the year. Suppose the risk-free interest rate is 5.3% 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: EM131781908

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