Gladstone Corporation is about to launch a new product. Depending on the success of the newproduct, Gladstone may have one of four values nextyear: $151 million, $131 million, $99 million, and $76 million. These outcomes are all equallylikely, and this risk is diversifiable. Suppose therisk-free interest rate is 5% andthat, in the event ofdefault, 24% of the value ofGladstone's assets will be lost to bankruptcy costs.(Ignore all other marketimperfections, such astaxes.)

a. What is the initial value ofGladstone's equity withoutleverage?

The initial value ofGladstone's equity without leverage is $..................... million. (Round to two decimalplaces.)

Now suppose Gladstone haszero-coupon debt with a $100 million face value due next year.

b. What is the initial value ofGladstone's debt?

The initial value ofGladstone's debt is $.................million. (Round to two decimalplaces.)

c. What is theyield-to-maturity of thedebt? What is its expectedreturn?

Theyield-to-maturity is .....................%. (Round to two decimalplaces.)

The expected return is ...................%. (Round to the nearestinteger.)

d. What is the initial value ofGladstone's equity?

The initial value ofGladstone's equity with leverage is $................... million. (Round to two decimalplaces.)

What isGladstone's total value withleverage?

Gladstone's total value with leverage is $....................million.(Round to two decimalplaces.)

Suppose Gladstone has 10 million shares outstanding and no debt at the start of the year.

e. If Gladstone does not issuedebt, what is its shareprice?

If Gladstone does not issuedebt, the price is $....................per share. (Round to the nearestcent.)

f. If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchaseshares, what will its share pricebe?

If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchaseshares, the price is $.................per share.(Round to the nearestcent.)

Why does your answer differ from that in part (e)? (Select the best choicebelow.)

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.