2. You have collected information about firm XYZ as follows: The debt of the firm: par value = $800, annual coupon = $100 (paid once a year), maturity = 3 years. The total value of the firm (including equity and the debt) = $1,000 now. The firms future values follow a two-state path with Up state growth multiple u = 1.3 and Down state growth multiple d = 0.769 each year. The annual risk-free rate = 2%.

(a) What is the value of the firm's debt, if it is a straight corporate debt?

(b) Suppose now that instead of a straight corporate debt as in (1), the firms debt is convertible for 40% of the firms value. What is the value of the convertible corporate debt?