Thursday, December 19, 2019

Corporate Finance and Gladstone - 1058 Words

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†¦show more content†¦c. What is Kohwe’s share price today if the investment is financed with debt? Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $9 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for Kohwe’s future free cash flows is still 8%. d. What is Kohwe’s share price today given the financial distress costs of leverage? a. 10 − 50 = million $75 0.08 b. 75 = $15 / share 5 c. 75 + 0.4 Ãâ€" 50 = $19 / share 5  ©2011 Pearson Education, Inc. Publishing as Prentice Hall 204 Berk/DeMarzo †¢ Corporate Finance, Second Edition d. 16-18. 9 − 50 + 0.4 Ãâ€" 50 0.08 = $16 / share 5 Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $10 million in one year. Alternatively, the firm can develop the land at an upfront cost of $20 million. The developed land will be worth $35 million in one year. Suppose the risk-free interest rate is 10%, assume all cash flows are risk-free, and assume there are no taxes. a. If the firm chooses not to develop the land, what is the value of the firm’s equity today? What is the value of the debt today? b. 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