Use the Information for the Question(s)below

question 51

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 yield to maturity of MI's debt is closest to:

• A)13.75%.
• B)5.00%.
• C)19.25%.
• D)12.50%.

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Definitions:

Company Budget

A financial plan for a specific period outlining projected revenue, expenses, and allocations.

On-The-Job Training

Training method that teaches an employee to complete new tasks by performing them under the guidance of an experienced employee.

Apprenticeship Programs

These are formalized training programs that combine on-the-job training with classroom instruction, usually sponsored by employers or labor unions, to prepare individuals for skilled trades.

Classroom Lectures

A traditional educational method where an instructor provides a presentation or talk to a group of students in a classroom setting.