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JR Industries has a $20 million loan due at the end of the year and under its current business strategy its assets will have a market value of only $15 million when the loan comes due. JR is considering a new much riskier business strategy. While this new riskier strategy can be implemented using JR's existing assets without any additional investment, the new strategy has only a 40% probability of succeeding. If the new strategy is a success, the market value of JR's assets will be $30 million, but if the strategy fails the assets will be worth only $5 million.

What is the expected payoff to debt holders under JR's new riskier business strategy?

A. $4 million
B. $11 million
C. $20 million
D. $15 million

 

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