Use the Information for the Question(s)below

question 111

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 initial value of MI's debt is closest to:

• A)$110 million.
• B)$105 million.
• C)$125 million.
• D)$111 million.

---

Definitions:

Manufacturer

A company or individual that produces finished goods from raw materials through the use of tools, machinery, and processes.

Nationwide Advertising

Advertising campaigns that are designed and broadcast across an entire country, targeting a national audience.

Promotional Channel Strategy

An approach to reaching potential customers through various forms of media, aimed at increasing awareness and sales of a product or service.

Postpurchase Anxiety

The feeling of regret or doubt experienced by a customer after making a significant purchase, which can lead to dissatisfaction or returns.