Use the Information for the Question(s)below

question 10

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

• A)12.5%.
• B)7.8%.
• C)25.0%.
• D)5.0%.

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Definitions:

Marginal Cost

The outlay involved in producing an extra unit of a product or service.

Marginal Benefit

The increased pleasure or benefit received from consuming an additional unit of a product or service.

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A large, often outdoor structure for sports, concerts, or other events, featuring tiers of seats for spectators.

Pork-Barrel Legislation

Government spending for localized projects secured primarily to bring money to a representative's district, often criticized as wasteful and politically motivated.