Use the Information for the Question(s)below

question 51

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 yield to maturity of MI's debt is closest to:

• A)13.75%.
• B)5.00%.
• C)19.25%.
• D)12.50%.

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Definitions:

Clumped Dispersion

A pattern of population distribution in which individuals are aggregated in patches, often due to environmental factors or social interactions, enhancing survival.

Patchy Distribution

A spatial distribution pattern where entities are clustered in several small areas, separated by areas with no or low occurrences of these entities.

Growth Rate

The rate at which an organism or any of its parts increases in size or number over a specific period.

Population

A group of individuals of the same species living and interacting in the same geographical area.