Use the Information for the Question(s)below

question 64

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.Suppose that at the start of the year,MI has no debt outstanding,but has 5.6 million shares of stock outstanding.If MI does not issue debt,its share price is closest to:

• A)$5.15.
• B)$23.75.
• C)$23.90.
• D)$25.00.

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Definitions:

Aggregate Demand

The collective appetite for goods and services in an economy, valued at a certain price point during a precise time interval.

Real GDP

Gross Domestic Product adjusted for inflation, measuring the value of goods and services produced in a country in a given time period.

Price Level

A measure that reflects the average of current prices across the entire spectrum of goods and services produced in the economy.

Aggregate Supply Curve

Represents the total quantity of goods and services that producers in an economy are willing and able to supply at a given overall price level in a given period.