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.
Assume that in the event of default, 20% of the vale of MI's assets will be lost in bankruptcy costs and suppose that MI has zero-coupon debt with a $125 million face value the next year. The present value of MI's financial distress cost is close to?
$20 million?
6.6 million
6.3million
19million?
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