Use the Information for the Question(s)below

question 23

Multiple Choice

Use the information for the question(s) below.
Monsters Incorporated (MI) is ready to launch a new product.Depending upon the success of this product,MI will have a value of either $100 million,$150 million,or $191 million,with each outcome being equally likely.The cash flows are unrelated to the state of the economy (i.e.risk from the project is diversifiable) so that the project has a beta of 0 and a cost of capital equal to the risk-free rate,which is currently 5%.Assume that the capital markets are perfect.
-The initial value of MI's equity without leverage is closest to:

• A)$133 million.
• B)$147 million.
• C)$140 million.
• D)$150 million.

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Definitions:

Foot-In-The-Door Effect

A psychological principle stating that people are more likely to agree to a large request after first agreeing to a small one.

Individualism

A philosophy that places the freedom of personal actions above the regulation by collective entities or state power.

Deceived

Refers to being misled or fooled into believing something that is not true.

Obedience Experiments

Psychological tests that study the extent to which a person can be made to comply with orders, often in conflict with personal conscience.