[1 mark] d. What business form would you recommend Hannah to adopt? Why? Suppose Hannah has registered her business as a private company with 100 shares and no initial assets. She can open her store in a big or a small city. The investment cost of opening a store is $300,000 in both cities. Cake demand in a big city is known, and if Hannah opens a store in a big city, the value of the store would be $400,000. Cake demand in a small city is uncertain and there is a 0.5 chance the value of the cake store is $800,000 if demand is high and 0.5 chance the value is $200,000 when cake demand turns out to be low. Hannah is considering different methods to borrowing $300,000 to finance the investment cost. Assume all agents are risk neutral. e. Suppose Hannah issues a straight bond that promises to pay back $350,000 when the value of the store is observed. Discuss the concerns of potential bond holders. [3 marks] f. Discuss how a convertible bond that promises to pay back $350,000 and the bond holder has the option to convert the bond to 70 shares can help to address the above concerns. [3 marks] [1 mark] d. What business form would you recommend Hannah to adopt? Why? Suppose Hannah has registered her business as a private company with 100 shares and no initial assets. She can open her store in a big or a small city. The investment cost of opening a store is $300,000 in both cities. Cake demand in a big city is known, and if Hannah opens a store in a big city, the value of the store would be $400,000. Cake demand in a small city is uncertain and there is a 0.5 chance the value of the cake store is $800,000 if demand is high and 0.5 chance the value is $200,000 when cake demand turns out to be low. Hannah is considering different methods to borrowing $300,000 to finance the investment cost. Assume all agents are risk neutral. e. Suppose Hannah issues a straight bond that promises to pay back $350,000 when the value of the store is observed. Discuss the concerns of potential bond holders. [3 marks] f. Discuss how a convertible bond that promises to pay back $350,000 and the bond holder has the option to convert the bond to 70 shares can help to address the above concerns. [3 marks]