Use the Information for the Question(s)below

question 30

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.
-Assuming that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs,the initial value of MI's equity without leverage is closest to:

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

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Definitions:

Operating Activity

Business actions involving the day-to-day operations that generate revenue and incur expenses in the production of goods or services.

Investing Activity

Transactions involving the purchase and sale of long-term assets and investments, part of a company's cash flow activities.

Financing Activity

Transactions that result in changes in the size and composition of the equity capital or borrowings of a company.

Net Income

The total earnings of a company after all expenses and taxes have been subtracted from total revenue.