Question 2. Convertible Bonds (34 points) Universal Investment Inc. is currently invested in a one-period project,...

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Question 2. Convertible Bonds (34 points) Universal Investment Inc. is currently invested in a one-period project, generating 120 or 80 with equal chance. The face value of corporate bond is 90. There are 10 shares outstanding in total, which are owned solely by the manager. Assuming there is no time discount and all investors and the manager are risk neutral. a. (6 points) Assume that another project becomes available when replacing for the existing investment, generating 180, 70, or 20 with equal chance. Does replacement occur? Is it optimal for the company? 8 Question 2. Convertible Bonds (34 points) Universal Investment Inc. is currently invested in a one-period project, generating 120 or 80 with equal chance. The face value of corporate bond is 90. There are 10 shares outstanding in total, which are owned solely by the manager. Assuming there is no time discount and all investors and the manager are risk neutral. a. (6 points) Assume that another project becomes available when replacing for the existing investment, generating 180, 70, or 20 with equal chance. Does replacement occur? Is it optimal for the company? 8