Use the Information for the Question(s)below

question 13

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 total value of MI with leverage is closest to:

• A)$133 million.
• B)$140 million.
• C)$147 million.
• D)$125 million.

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Definitions:

Price

The sum of money needed to buy a product, service, or property.

Producer Surplus

The difference between the amount producers are willing to sell a good for and the higher price they actually receive.

Tax

A compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Area

A measure of the extent of a two-dimensional surface or shape, or the amount of space inside the boundary of a flat (2D) object.