Use the Information for the Question(s)below

question 68

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 initial value of MI's equity is closest to:

• A)$30 million.
• B)$15 million.
• C)$29 million.
• D)$24 million.

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Definitions:

Mood Disorders

Mental disorders characterized by significant changes in mood, including depression and bipolar disorder.

Ego Ideal

Part of the psychoanalytic theory referring to the part of the self concerned with aspirations, achievements, and the moral standards one wishes to fulfill.

Superego

The superego is one of the three parts of the human psyche in Freudian psychoanalytic theory, acting as the ethical component of the personality by providing moral standards.

Ego

In psychoanalytic theory, the part of the personality that mediates between the demands of the id, superego, and reality.