Use the Information for the Question(s)below

question 76

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 total value of MI with leverage is closest to:

• A)$140 million.
• B)$100 million.
• C)$125 million.
• D)$134 million.

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Definitions:

Collaboration

The process of two or more people or organizations working together to complete a task or achieve a goal.

Avoidance

A psychological defense mechanism where individuals sidestep potentially harmful or uncomfortable situations.

Competition

The rivalry among businesses or individuals for resources, recognition, or winning, often drives innovation and improvement.

Collaboration

Working together with one or more people to achieve a common goal, often in a creative and efficient manner.