Chapter16_xlsSol

Chapter16_xlsSol - Problems Problem 16-1 Problem 16-6...

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Problems Problem 16-1 Problem 16-6 Problem 16-13 Problem 16-16 Problem 16-17
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Problem 16-1 a. Use arbitrage to determine the yield to maturity of a two-year, zero-coupon bond. 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? 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% a. Initial value of equity without leverage 109.52 Outcome 1 Outcome 2 Outcome 3 Outcome 4 Equity value 50.00 35.00 0.00 0.00 Debt value 100.00 100.00 95.00 80.00 Total to all investors 150.00 135.00 95.00 80.00 Probability 25.00% 25.00% 25.00% 25.00% b. Initial value of debt 89.29 c. Promised return 12.00% Expected return 5.00% d. 20.24 Total value with leverage 109.52 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 assume perfect capital markets. Initial value of equity with leverage
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Problem 16-6 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. 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% Shares outstanding (millions) 10.00 a. Expected equity value without leverage 109.52 Outcome 1 Outcome 2 Outcome 3 Outcome 4 Equity value 50.00 35.00 0.00 0.00 Debt value 100.00 100.00 71.25 60.00 Total to all investors 150.00 135.00 95.00 80.00 Probability 25.00% 25.00% 25.00% 25.00% Cost of financial distress 0.00 0.00 23.75 20.00 Risk-free rate 5.00% b. Initial value of debt 78.87 c.
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This note was uploaded on 02/02/2012 for the course BUS 438 taught by Professor Dutt during the Winter '12 term at Cal Poly.

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Chapter16_xlsSol - Problems Problem 16-1 Problem 16-6...

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