F generates a single cash-flow in one year. This cash-flow depends on the strategy chosen by the management:

• The safe strategy yields a certain cashflow of $3,500,
• The risky strategy yields a high cashflow of $15,000 with probability 0.2, and a low cash-flow of $625 with probability 0.8.

F has 3 stocks outstanding and one bond with a $2,000 face value, a 5% annual coupon and a one-year maturity. All agents are risk neutral and the risk free rate is 5%.

1) If the bond is convertible with a conversion ratio of 4, which strategy does the management choose and why? In what cases do the bondholders convert in what cases do they not convert (they can see the cashflow before converting)?