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:

Marginal Cost

Additional financial obligation incurred by producing another unit of a product or service.

Product-Variety Externality

Occurs when the introduction of new products benefits consumers by expanding their choices, often leading to positive market effects.

Introduction

The initial section or the beginning part of a document, presentation, or text, aiming to give an overview or background of the subject matter.

Long-Run Equilibrium

A state where supply equals demand and all markets are in balance, typically achieved over a period where all inputs can be adjusted.