Use the Information for the Question(s)below

question 65

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 expected return of MI's debt is closest to:

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

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Definitions:

Marginal Revenue

The rise in income generated by the sale of an extra product or service unit.

Total Revenue

The sum of all revenue a business earns from its operational activities, like goods sales or service provision, prior to expense deduction.

Demand Curve

A graphical representation of the relationship between the price of a good and the quantity demanded for a given period.

Marginal Revenue Curve

A graphical representation showing how marginal revenue varies as output level changes, typically downward sloping for firms in competitive markets.