# Monsters Incorporated (MI) is ready to launch a new product. Depending upon the success of this product, MI will have a value of $100 million, $150 million, or $191 million, with each outcome being equally likely. The cash flows are unrelated to the state of the economy and the cost of capital is equal to the risk-free rate, which is

Monsters Incorporated (MI) is ready to launch a new product. Depending upon the success of this product, MI will have a value of $100 million, $150 million, or $191 million, with each outcome being equally likely. The cash flows are unrelated to the state of the economy and the cost of capital is equal to the risk-free rate, which is currently 5%. Assume that capital markets are perfect.

(a) The initial value of MI’s equity without leverage is closest to:

(1) $133 million

(2) $147 million

(3) $140 million

(4) $150 million

(b) 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:

(1) $125 million

(2) $111 million

(3) $100 million

(4) $116 million

(c) 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:

(1) $30 million

(2) $15 million

(3) $29 million

(4) $24 million

(d) Suppose that MI has zero-coupon debt with a $125 million face value due next year. The total value of MI with leverage is closest to:

(1) $133 million

(2) $140 million

(3) $147 million

(4) $125 million

(e) Assuming that in the event of default, 20% of the value of MI’s assets will be lost in bankruptcy costs, the initial value of MI’s equity without leverage is closest to:

(1) $150 million

(2) $147 million

(3) $140 million

(4) $133 million

(f) 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 total value of MI with leverage is closest to:

(1) $140 million

(2) $100 million

(3) $125 million

(4) $134 million

(g) 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 present value of MI’s financial distress cost is closest to:

(1) $20 million

(2) $6.6 million

(3) $6.3 million

(4) $19 million

**Related Book For**

## Project Management A Managerial Approach

7th Edition

Authors: Jack R. Meredith, Samuel J. Mantel,

ISBN: 978-0470226216