Use the Information for the Question(s)below

question 111

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 initial value of MI's debt is closest to:

• A)$110 million.
• B)$105 million.
• C)$125 million.
• D)$111 million.

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Definitions:

Financial Basis

The underlying value or criteria used for accounting or financial management purposes, often referred to as the method of recognizing revenues and expenses.

Production Process

The method or series of actions taken to manufacture a product, from the acquisition of raw materials to the final product.

Present Value

Today's value of a future money amount or sequence of cash flows, determined by a certain rate of return.