Universal Investment Inc. is currently invested in a one-period project, generating 120 or 80 with equal chance. The face value of debt is 90. There are 10 shares outstanding. Assuming there is no time discount and all investors, and the manager are risk neutral.

a) Assume that another project becomes available when replacing for the existing investment, generating 180, 70, or 20 with equal chance. If the manager is aligned with equity holders, does replacement occur? Is it optimal for the company?

b) (Continuing on part a.) Instead of using traditional bonds, if Universe Investment Inc. issues 10 convertible bonds each with face amount 9 and that can be converted into 7 shares of equity, does the replacement occur?

c) Now forget about the project replacement. Assume that there is another investment opportunity available with initial investment outlay 50 generating safe cash flow 54. If taken, the new investment comes from equity financing. Will it be taken if the company is currently with corporate bond of face value 90 together with 10 shares outstanding (like described in the main context)?

d) (Continuing on part c.) Instead of using traditional bonds, if Universe Investment Inc. issues 10 convertible bonds each with face amount 9 and that can be converted into 7 shares of equity with 0 conversion fee at the first place, will the new project be taken via equity financing?