Use the Following Information for Questions

Multiple Choice

Use the following information for questions
National Cleaner Corp.needs a $1.5 million loan to finance a project that pays off next period.There are two projects available, A and B.You are a lending officer and know about the projects but cannot control the borrower's project choice.A will yield a payoff of $6.75 million with probability 0.6 or zero with probability 0.4.B will pay off $8 million with probability 0.5 or zero with probability 0.5.Everybody is risk neutral and the riskless interest rate is 10%.You consider designing a loan contract that involves the use of collateral However, collateral is costly and $1 of the borrower's collateral is worth only 90 cents to your bank.
-Suppose that you assume B will be chosen, and offer an unsecured loan.What project will the firm choose and what is the interest rate?

A) Project A with net expected payoff $4.05 million, interest rate 83.33%
B) Project A with net expected payoff $2.35 million, interest rate 83.33%
C) Project A with net expected payoff $2.07 million, interest rate 120%
D) Project B with net expected payoff $2.35 million, interest rate 120%
E) Project B with net expected payoff $4 million, interest rate 120%