Assume now that XYZ is hit by extremely bad news. In the current
situation, XYZ’s assets therefore have a value of $550,000, which
is problematic because XYZ owes $600,000 to the debt holders, who
must be repaid in the near future. The management of XYZ is
considering a new risky strategy that can either increase the value
of XYZ’s assets to $700,000 or reduce its value to $200,000. Both
outcomes are equally likely. XYZ can switch to the new strategy...