Use the Information for the Question(s)below

question 54

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 present value of MI's financial distress costs is closest to:

• A)$20.0 million.
• B)$6.6 million.
• C)$6.3 million.
• D)$19.0 million.

---

Definitions:

Saddam Hussein

The fifth President of Iraq from 1979 until 2003, known for his brutal regime, involvement in regional wars, and eventual ousting and execution by a U.S.-led coalition.

Toppling

The act of causing a government, statue, or institution to fall or be removed from power, typically in a sudden or forceful manner; synonymous with "Overthrow."

September 11

A significant date marking the terrorist attacks in 2001 on the World Trade Center in New York and the Pentagon, leading to widespread global effects.

Neoconservatives

A political movement in the United States, primarily among some conservatives, advocating for the promotion of democracy and American national interest in international affairs through military force if necessary.