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Initial value of mi equity is closest

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Reference no: EM131419881

Monsters Incorporated (MI) in 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 riskminusfree rate, which is currently 5%. Assume that the capital markets are perfect.Suppose that MI has zerominuscoupon debt with a $125 million face value due next year. The initial value of MI's equity is closest to:

A. $24 million
B. $30 million
C. $29 million
D. $15 million

Reference no: EM131419881

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