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:

Retinal Image

The visual image that is formed on the retina as light from the environment enters the eye, essential for vision.

Depth Perception

The visual ability to perceive the world in three dimensions (3D) and to judge the distance of objects.

John Locke

A 17th-century philosopher known for his work in political philosophy and epistemology, famously arguing that individuals possess natural rights.

Perceptual Skills

Abilities enabling individuals to recognize, organize, and make sense of information through the senses.