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:

Efficient Markets Hypothesis

The theory that financial markets fully reflect all available information at any given time, making it impossible to consistently achieve higher returns than the overall market.

Share Price

The current price at which a single share of a company's stock can be bought or sold in the financial markets.

Utility Function

A utility function is an economic model representing a consumer's preference ranking for various bundles of goods or services, quantifying satisfaction levels.

Probability

The measure of the likelihood that an event will occur, expressed as a number between 0 and 1.