Corporate Finance and Gladstone
Problem set 2
16-1.
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.
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? a.
0.25 ×
150 + 135 + 95 + 80
=
$109.52 million
1.05
b.
0.25 ×
100 + 100 + 95 + 80
=
$89.28 million
1.05
c.
YTM =
100
– 1= 12%
89.29
expected return = 5%
d.
16-8.
equity = 0.25 ×
50 + 35 + 0 + 0
= total value = 89.28 +20.24 = $109.52 million
$20.24 million
1.05
As in Problem 1, 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. Suppose the risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstone’s assets will be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.)
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
16-1.
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.
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? a.
0.25 ×
150 + 135 + 95 + 80
=
$109.52 million
1.05
b.
0.25 ×
100 + 100 + 95 + 80
=
$89.28 million
1.05
c.
YTM =
100
– 1= 12%
89.29
expected return = 5%
d.
16-8.
equity = 0.25 ×
50 + 35 + 0 + 0
= total value = 89.28 +20.24 = $109.52 million
$20.24 million
1.05
As in Problem 1, 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. Suppose the risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstone’s assets will be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.)
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