Suppose the firms end of period value will be:

Today’s firm value is 1000. The risk free rate is 5%. The firm has 10 shares of equity and 100 convertible bonds with a face value of 10 each. The bond pays no coupon. One bond can be converted into one share.
Compute the value of the convertible bond and of the equity.

Transcribed Image Text:

1500 with probability 0.6 Value 800 with probability 0.4