Inputs$/$Description Value

Value $1$: $$150,000,000$

Value $2$: $$135,000,000$

Value $3$: $$95,000,000$

Value $4$: $$80,000,000$

# of Shares: $10,000,000$

Risk Free Rate: $5\mathrm{.}00\%$

Probability of Default: $25\mathrm{.}00\%$

Debt: $$100,000,000$

Probability of Success: $75\%$

Scenario: Analyst IQ is about to launch a new product. Depending on the success of the product, Analyst IQ may have one of four $(4)$ values next year. 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 Analyst IQ$$s assets will be lost to bankruptcy costs. $($Ignore all other market imperfections such as taxes$)$

$***$Suppose Analyst IQ has zero coupon debt with a $$100$M face value due next year.

a$)$ What is the initial value of Analyst IQ$$ equity without leverage

b$)$ What is the initial value of Analys IQ debt

c$)$ What is the yield to maturity $($YTM$)$ of the debt? What is the expected return?

d$)$ What is the initial value of Analyst IQ$$s equity? What is Analyst IQ$$s total value with leverage

e$)$ Suppose Analyst IQ has $10$ million shares outstanding and no debt at the start of the year. If Analyst IQ does not issue debt what is its share price?

f$)$ If Analyst IQ issues debt of $$100$M due next year and uses the proceeds to repurchase shares, what will its share price be$?$ Why does your answer differ from that in Part e