Use the Information for the Question(s)below

question 41

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 initial value of MI's debt is closest to:

• A)$125 million.
• B)$111 million.
• C)$100 million.
• D)$116 million.

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Definitions:

Employee

A person who is hired by another person or business for a salary or wages to perform specific duties.

Confidential Information

Any data or information that is proprietary to a company and not to be shared with competitors or the general public.

Agency Relationship

A legal relationship in which one party, the agent, acts on behalf of another party, the principal, in transactions with third parties.

Disclose

To reveal or make known information that was previously private or secret.