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.

What is the initial value of Gladstones equity without leverage?

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

What is the initial value of Gladstones debt?

What is the yield-to-maturity of the debt? What is its expected return?

What is the initial value of Gladstones equity? What is Gladstones total value with leverage?

		Outcome 1		Outcome 2	Outcome 3	Outcome 4
Equity value		150.00		135.00	95.00	80.00
Probability		25.00%		25.00%	25.00%	25.00%
Initial value of equity
without leverage
		Outcome 1		Outcome 2	Outcome 3	Outcome 4
Equity value
Debt value
Total to all investors
Probability
b.	Initial value of debt
c.	Promised return
	Expected return
d.	Initial value of equity with leverage
	Total value with leverage