Furthermore firm has currently just one outstanding share

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Suppose that the assets of a firm are now priced at $100mil and are driven by a two-state binomial model and that the risk-free rate of interest is zero. Furthermore the firm has currently just one outstanding share. The asset return in the up-node at the end of one period is 20% while in the down-node (at the end of the one period) is 0%. The firm has a zero coupon convertible bond with one period to maturity as well and with a face value of 100mil.The bond is convertible into 11 shares of common stock at the maturity of the bond at the option of the bondholder. What should be the value of the convertible bond? What should be the value of the equity of the firm? What will happen if the risk free rate is 1% instead of 0%?

Reference no: EM131183620

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