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  Gladstone Corporation is about to launch a new product

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  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 next year. Suppose the risk-free interest rate is 5%. Assume there are no taxes.

a) What is the initial value of Gladstone's equity without leverage?

Now assume 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 the expected return?

d) What is the initial value of Gladstone's equity? What is Gladstone's total value with leverage?