# Question: Gladstone Corporation is about to launch a new product Depending

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: $150 million, $135 million, $95 million, or $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?

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?

## Answer to relevant Questions

Baruk Industries has no cash and a debt obligation of $36 million that is now due. The market value of Baruk’s assets is $81 million, and the firm has no other liabilities. Assume perfect capital markets.a. Suppose Baruk ...Petron Corporation’s management team is meeting to decide on a new corporate strategy. There are four options, each with a different probability of success and total firm value in the event of success, as shown ...According to the managerial entrenchment theory, managers choose capital structures so as to preserve their control of the firm. On the one hand, debt is costly for managers because they risk losing control in the event of ...AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the ...Consider Alcatel-Lucent’s project in Problem 5.a. What is Alcatel-Lucent’s unlevered cost of capital?b. What is the unlevered value of the project?c. What are the interest tax shields from the project? What is their ...Post your question