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:

Marginal Revenue

The additional income gained by selling one more unit of a product or service.

Total Cost

The sum of all expenses incurred in the production of goods or services, including both fixed and variable costs.

Total Revenue Curve

A graphical representation showing how a firm's total revenue changes with variations in the quantity of goods or services sold.

Price-Taking Behavior

The action of accepting the market price as given, typical of participants in a perfectly competitive market who cannot influence prices.