Question

In: Finance

Gladstone Corporation is about to launch a new product. Depending on the success of the new​...

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:

$ 146 million,$ 130 million,$ 91million, and $ 79million. 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, 24 %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 initial value of​ Gladstone's equity? What is​ Gladstone's total value with​ leverage?

Suppose Gladstone has 10 million shares outstanding and no debt at the start of the year.

e. If Gladstone does not issue​ debt, what is its share​ price?

f. If Gladstone issues debt of $ 100 million 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​)?

Solutions

Expert Solution


Related Solutions

Gladstone Corporation is about to launch a new product. Depending on the success of the new​...
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: $ 152 ​million, $ 140 ​million, $ 95 ​million, and $ 84 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, 27 % of the value of​ Gladstone's assets will be lost to bankruptcy costs.​ (Ignore...
Gladstone Corporation is about to launch a new product. Depending on the success of the new?...
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: $ 153 ?million, $ 139 ?million, $ 95 ?million, and $ 79 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, 30 % of the value of? Gladstone's assets will be lost to bankruptcy costs.? (Ignore...
Gladstone Corporation is about to launch a new product. Depending on the success of the new​...
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: $ 155 ​million, $ 137 ​million, $ 96 ​million, and $ 83 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, 23 % of the value of​ Gladstone's assets will be lost to bankruptcy costs.​ (Ignore...
Gladstone Corporation is about to launch a new product. Depending on the success of the new...
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, $90 million, or $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...
Gladstone Corporation is about to launch a new product. Depending on the success of the new​...
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: $ 153 ​million, $ 131 ​million, $ 96 ​million, and $ 85 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 4.7 % and assume perfect capital markets. a. What is the initial value...
Gladstone Corporation is about to launch a new product. Depending on the success of the new​...
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: $146 ​million, $138 ​million, $92 ​million, and $81 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, 28% of the value of​ Gladstone's assets will be lost to bankruptcy costs.​ (Ignore all other market​ imperfections, such as​...
gladstone is about to launch a new product. depedning on the success of the new product,...
gladstone is about to launch a new product. depedning on the success of the new product, gladstone may have one of four values next year: $155 million, $130 million, $97 million, or $82 million. these outcomes are equally likely and the risk is diversifiable. gladstone will not make any payouts to investors during the year. suppose the risk-free interest rate is 5.2% and assume perfect capital markets. a) the intitial value of gladstones equity withut leverage is $______ million. b)...
Brutech Corporation is considering whether or not to launch its new product, a kioskfor checking in...
Brutech Corporation is considering whether or not to launch its new product, a kioskfor checking in medical patients at doctor’s offices. Marketing research is confidentthe kioskwill sell 1,300units per year, but the finance department is also evaluating the risks that unit sales and other key forecast variables might pose if the initial data differs from reality. In the Base Case, the selling price on the 1,300 units will be $2,100 per kiosk. Variable costsper unitwill be $1,300, and fixed costs...
When a company is about to launch a new product, it must necessarily add inventory of...
When a company is about to launch a new product, it must necessarily add inventory of the product before the launch in stores. This would _________ free cash flow in the period the inventory was created. A. decrease B. have no effect on C. increase D. first decrease, then increas A “firm commitment” in a public offering of securities would be made by which kind of bank? A. A commercial bank B. An investment bank C. Both a. and b....
A firm is about to launch a new consumer product that is purchased frequently (e.g., toothpaste)...
A firm is about to launch a new consumer product that is purchased frequently (e.g., toothpaste) and plans a massive advertising campaign. After analyzing focus group outcomes, company estimates that: – 35% of the potential buyers will see the ads. – Of those who see the ads, 40% will try the product. – Of those who try the product after seeing the ads, 45% will become regular users. The firm also estimates that: – Of those potential buyers who do...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT