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Use the Information for the Question(s)below

question 81

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 issues debt of $125 million due next year and uses the proceeds to repurchase shares,the share price following the announcement of the repurchase will be closest to:

Definitions:

Hypothetical Data

Data or information that is assumed or simulated based on certain conditions or parameters, used for theoretical analysis or making predictions.

Surplus

A situation where the quantity of goods or services supplied exceeds the quantity demanded at the current price.

Deficit

The amount by which expenses exceed income or revenues, commonly used in the context of government budgets.

Exchange Rate

The value of one currency for the purpose of conversion to another, determining how much of one currency can be exchanged for another.