businessfinancefinance questions and answersF Generates A Single Cash-flow In One Year. This Cash-flow Depends On The Strategy Chosen By …Question: 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 Cash-flow Of $3,500, – The Risky Strategy Yields A High Cash-flow 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 …This question hasn’t been answered yetAsk an expertF 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 cash-flow of $3,500,
– The risky strategy yields a high cash-flow 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 non-convertible, which strategy does the
management choose and why?
2. 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)?
3. Suppose the bond has not been issued yet and that both
projects cost 2,000. The firm wants to issue the same convertible
bond as in 2.2 but must include one of the following covenants to
the bond:
-Covenant A: restricts the firm to only invest in the safe
asset.
-Covenant B: restricts the firm to only invest in the risky
asset.
Assuming the creditors pay market value for the bonds, which
covenant will the firm include and why?
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