Use the Information for the Question(s)below

question 76

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.
-Assume that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs and 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)$140 million.
• B)$100 million.
• C)$125 million.
• D)$134 million.

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Definitions:

Observational Studies

Research methods where the investigator observes subjects without manipulation, aiming to find correlations between variables.

Planetary Motion

The movement of planets around a star, such as the orbit of Earth and other planets around the Sun.

Proxy Variable

An auxiliary variable used in statistical analyses to represent an unobservable or difficult-to-measure variable.

Confounding Variable

A variable that influences both the dependent variable and independent variable, causing a spurious association.