Use the Information for the Question(s)below

question 41

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 initial value of MI's debt is closest to:

• A)$125 million.
• B)$111 million.
• C)$100 million.
• D)$116 million.

---

Definitions:

Dischargeable Debts

Debts that can be wiped out or eliminated in bankruptcy proceedings.

Good Faith

Acting with honesty and integrity in dealings, without the intent to defraud or seek unfair advantage.

Debtor

An individual or organization that owes money to another party.

Trustee in Bankruptcy

An individual or corporation appointed in a bankruptcy case to represent the interests of the creditors, manage the debtor's estate, and distribute assets accordingly.