Gladstone Corporation is about to launch a new product. Depending on the success of the newproduct, Gladstone may have one of four values nextyear: $154 million, $130 million, $96 million, and $83 million. These outcomes are all equallylikely, and this risk is diversifiable. Suppose therisk-free interest rate is 5% andthat, in the event ofdefault, 22% 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?

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

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

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

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

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?

f. If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchaseshares, what will its share pricebe? Why does your answer differ from that in part (e)?