Use the Following Information for Questions

Multiple Choice

Use the following information for questions
You are evaluating a loan request of $2.5 million from Dubious Corp.The firm has an existing debt repayment obligation of $5 million.It has $2.6 million of equity.The firm has two projects, A and B.An investment in A will yield a payoff of $5 million with probability
0.8 and $2.5 million with probability 0.2.Project B will yield a payoff of $8 million with probability 0.4 and zero with probability 0.6.The firm has assets-in-place that generates $6 million with probability 0.8 and zero with probability 0.2.Assume that the distributions of payoff from projects A and B are common knowledge, and the payoff from A is statistically independent of the payoff from B.However, as a bank lending officer, you cannot observe the firm's project choice.
-Suppose the firm has the $2.6 million equity and you assume that project A will be chosen.What interest rate will you charge in order to break-even?

A) 3%
B) 4%
C) 8.5%
D) 10%
E) 12.4%