on 1-c, why do you subtract 10x10 from 300? -------------

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MGMT 109 Homework 6 Solutions November 20, 2017 Jie Gac 1. XYZ company has 20 outstanding shares of stocks and 10 bonds. All the bonds are held by Mr. Black. XYZ company promises to pay each bond $10 in the end of year. (a) (bl If the rm's value is $80, what is Mr. Black's value? What are the existing shareholders' values? Solution: The value of the bonds held by Mr. Black is 10 x $10 = $100. Because the rm's value is $80 which is less than $100, Mr. Black's value would be $80 and the existing shareholders' value would be 0. I If the rm's value is $120, what is Mr. Black's value? What are the existing shareholders' values? Solution: The same as (a), in this case, the value of the bonds held by Mr, Black is $100. If the rm's value is $120, then the existing shareholders' value would be $120 $100 = $20. I Suppose that XYZ comp any has also 10 convertible bonds, which are also owned by Mr. Black. He can choose to convert the bonds into equities in the end of this year. Each convertible bond can be exchanged to B shares of stocks. Otherwise, the convertible bonds will be the same as the common bonds. (C) What is Mr. Black's value if the rm's value is $300? Solution: If the rm's value is $300 and Mr. Black chooses not to convert his bonds, his value comes from 10 regular bonds and 10 convertible bonds, which is (10+ 10) x $10 = $200. If he chooses to convert the bonds, the value of each stock is $300 10 x $10 = 80 + 20 $2 and his value will be $100 + 80 x $2 = $260. Therefore, Mr. Black will convert his bonds and his value is $260