Use the Information for the Question(s)below

question 81

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 issues debt of $125 million due next year and uses the proceeds to repurchase shares,the share price following the announcement of the repurchase will be closest to:

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

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Definitions:

Deductive Reasoning

A logical process in which a conclusion is based on the concordance of multiple premises that are generally assumed to be true.

Cognitive Skills

Mental abilities involved in processing information, understanding concepts, and solving problems.

Maturation

The process of development in which an individual matures or reaches full functionality and growth, often referring to physical, psychological, or emotional development.

Socialization

The process by which individuals learn and internalize the values, beliefs, and norms of their culture and society to function as its members.