Gladstone Corporation is about to launch a new product. Depending on the success of the newproduct, Gladstone may have one of four values nextyear: $153 million, $131 million, $95 million, and $80 million. These outcomes are all equallylikely, and this risk is diversifiable. Gladstone will not make any payouts to investors during the year. Suppose therisk-free interest rate is 5.2% and assume perfect capital markets.

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?