Use the Information for the Question(s)below

question 13

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.
-Suppose that MI has zero-coupon debt with a $125 million face value due next year.The total value of MI with leverage is closest to:

• A)$133 million.
• B)$140 million.
• C)$147 million.
• D)$125 million.

---

Definitions:

Economic Changes

Variations or shifts in the economic environment that can affect the performance and strategies of businesses.

Effective Income Tax Rate

The average percentage of their total income that individuals or corporations pay in taxes, reflecting the actual rate of taxation rather than the nominal tax rate.

Statutory Income Tax Rate

The prescribed rate by law that a company or individual pays on income, differing by country and sometimes by income level or source.

Tax Jurisdiction

The legal authority granted to a government entity to impose taxes on individuals, businesses, or transactions within a defined geographical area.