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Dynamic Systems, Inc.is in financial trouble.It has three types of debt: a bank loan of $400 with the highest priority, a senior debt of $100 owned by bondholders with the next highest priority, and a junior debt of $100 owned by bondholders with the lowest priority.These debts are due in one period.The firm has announced its intention to declare bankruptcy.At this stage, the creditors must choose one of two mutually exclusive restructuring plAns.plan A with which the firm's asset next period will be $450 with probability 0.8 and $250 with probability 0.2; or plan B with which the asset's value will be $600 with probability 0.4 or $100 with probability 0.4.Everybody is risk neutral, and the discount rate is zero.
-What is the junior debt holders' expected payoff under plan B?

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Dynamic Systems, Inc.is in financial trouble.It has three types of debt: a bank loan of $400 with the highest priority, a senior debt of $100 owned by bondholders with the next highest priority, and a junior debt of $100 owned by bondholders with the lowest priority.These debts are due in one period.The firm has announced its intention to declare bankruptcy.At this stage, the creditors must choose one of two mutually exclusive restructuring plAns.plan A with which the firm's asset next period will be $450 with probability 0.8 and $250 with probability 0.2; or plan B with which the asset's value will be $600 with probability 0.4 or $100 with probability 0.4.Everybody is risk neutral, and the discount rate is zero.
-What is the junior debt holders' expected payoff under plan B?

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Under plan B, the junior debt holders will only receive payments if the value of the assets is $100 in the next period, which happens with a probability of 0.4. In that case, the total asset value will be $600 + $100 (since there is no senior or other debt to pay off), and the junior debt holders will receive $100, which is their full payoff. Hence, the expected payoff for the junior debt holders under plan B is 0.4*$100 = $40.

As for the best choice, it depends on the priority of the creditor. If you are a senior debt holder, plan A is clearly the best choice as it guarantees a higher asset value ($450) than plan B. As for junior debt holders, plan B is the best option because it offers the chance of a higher asset value ($600) and a higher potential payoff if the asset's value ends up being $100. So, the best choice for junior debt holders is plan B.

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