Question
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,
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
Step by Step Solution
3.48 Rating (155 Votes )
There are 3 Steps involved in it
Step: 1
a Value of unlevered equity 1001501913105 147105 140 million ie choice 3 b MI has zerocoupon d...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started