Use the Information for the Question(s)below

question 111

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 and suppose that MI has zero-coupon debt with a $125 million face value due next year.The initial value of MI's debt is closest to:

• A)$110 million.
• B)$105 million.
• C)$125 million.
• D)$111 million.

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Definitions:

FIFRA

The Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) governs the registration, distribution, sale, and use of pesticides in the United States.

TSCA

The Toxic Substances Control Act, a United States law passed by Congress in 1976 designed to regulate the introduction of new or already existing chemicals.

Premanufacturing Notice

A requirement under environmental law for manufacturers to notify a government agency before producing or importing new chemicals.

EPA

The Environmental Protection Agency, which focuses on the conservation of the environment and protecting human health through the enforcement of regulations.