Use the Information for the Question(s)below

question 65

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 expected return of MI's debt is closest to:

• A)25.0%.
• B)12.5%.
• C)5.0%.
• D)7.8%.

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Definitions:

Corn Market

A marketplace for buying and selling corn, influenced by supply and demand dynamics, weather conditions, and global trade policies.

Overallocation

A situation where resources are distributed or used in excess of their optimum level or need, often leading to inefficiency.

Parity Concept

A principle in economics or finance where two currencies, securities, or commodities have the same value or purchasing power.

Farm Commodities

Agricultural products such as grains, milk, cattle, fruits, and vegetables that are usually sold to processors, who use the products as inputs in creating food products.