Gladstone Corporation is about to launch a new product. Depending on the success of the...
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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: $146 million, $132 million, $99 million, and $82 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 5.4% 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
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