Use the Information for the Question(s)below

question 64

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.Suppose that at the start of the year,MI has no debt outstanding,but has 5.6 million shares of stock outstanding.If MI does not issue debt,its share price is closest to:

• A)$5.15.
• B)$23.75.
• C)$23.90.
• D)$25.00.

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Definitions:

Cost

The value of the financial resources expended to acquire or produce a product or service.

Selling Price

The amount of money for which a product or service is offered for sale to consumers.

Risks

The potential for losing something of value, which can be financial, physical, emotional, or otherwise, as a result of actions taken or events that occur.

Ownership

The state or fact of exclusive rights and control over property, which can be an object, land/real estate, intellectual property, or some form of rights to assets.