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.
-Under the assumption that the firm doesn't have equity capital and the loan is priced assuming that A is chosen, what will be the expected value of equity if the firm switches to project B?

A) $4.16 million
B) $3.56 million
C) $2.36 million
D) $1.90 million
E) $1.88 million