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:

• A)$23.90.
• B)$23.75.
• C)$25.00.
• D)$5.15.

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Definitions:

Insurance Benefits

Insurance benefits are payments made by an insurance company to the insured or a designated beneficiary under the terms of an insurance policy.

Ceteris Paribus Assumption

A Latin term meaning "all other things being equal," used in economics to isolate the effect of one variable on another by holding all other relevant factors constant.

Comparative Economics

Comparative economics studies and contrasts the differences, advantages, and disadvantages of various economic systems, such as capitalism and socialism.

Economic Theory

A framework or set of principles used to analyze and make predictions about economic behaviors and phenomena.