Use the Information for the Question(s)below

question 105

Multiple Choice

Use the information for the question(s) below.
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 equity holders under JR's new riskier business strategy?

• A)$15 million
• B)$11 million
• C)$20 million
• D)$4 million

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Definitions:

Product Differentiation Strategy

A marketing strategy that businesses use to distinguish their products from similar offerings in the market, through unique features, branding, or quality.

Cost Reduction

The process of identifying and eliminating unnecessary costs to improve a company's profitability.

Product Innovation

The creation and introduction of new or significantly improved goods or services in the market.

Management Accounting System

A system used by businesses to provide financial and statistical information to managers for making short-term and long-term decisions.