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, and $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. Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. 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? Total to all investors (million) Probability Outcome 1 $150.000 25% Outcome 2 $135.00 25% Outcome 3 $95.00 25% Outcome 4 $80.00 25% Risk-free interest rate 5% Face value of debt (million) $100.00 Outcome 1 Outcome 2 Outcome 3 Outcome 4 Weighted equity value (million) Debt value (million) Weighted debt value (million) Equity value with leverage (million) Weighted equity value with leverage (million) a. What is the initial value of Gladstone's equity without leverage? Weighted average equity (million) Initial value of equity without leverage (million) 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? Weighted average debt (million) Most likely value of debt (million) c. What is the yield-to-maturity of the debt? What is its expected return? Promised return (YTM) Expected return of debt d. What is the initial value of Gladstone's equity? What is Gladstone's total value with leverage? Weighted average equity with leverage (million) Most likely value of equity with leverage (million) Total value with leverage (million)
