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

riskfree

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:

Question content area bottom

Part 1

A.

$25.00.

B.

$23.90.

Your answer is correct.

C.

$5.15.

D.

$23.75.

answer is $23.90 need steps