On 1 July 2017 Stark Manufacturers issues convertible notes at their face value of $7,500,000. The notes are convertible into ordinary shares at the discretion of the holders. The notes pay interest at the rate of 3% per year each 30 June and mature in 7 years (on 30 June 2024). The company has a 30 June balance date.

On 1 July 2017, comparable debt without the conversion option yields 5% per year. The value of the conversion option on 1 July 2017 is (rounded to nearest thousand dollars):

Select one:

a. $225,000

b. $2,170,000

c. $ zero

d. $337,000

e. $868,000