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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

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: $171, $135, $95, and $80. These outcomes are all equally likely, and this risk is diversifiable. Suppose the risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstones assets will be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.) Initially, Gladstone was an all-equity firm with 10 shares outstanding. Gladstone is going to issue zero-coupon debt with a $105 face value due next year. How much is the change in stock price? Why answer is -0.5413??

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