Assume Jamestown Markets has 500 shares of stock and 100 bonds outstanding. The bonds have a face value of $1,000, are convertible into 5 shares of newly issued common stock, and mature today. What is the value of this firm to its shareholders if the total value of the firm is $184,500? What if the value is $225,000? A. $0; $125,000
B. $84,500; $112,500
C. $92,250: $125,000
D. $84,500; $125,000

C. $92,250: $125,000

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Explanation:

Currently, the company has 500 shares and 100 bonds,with each bond convertible into 5 shares each, hence, we need to determine the value of debt based on the number of shares it is convertible to as shown thus:

shares equivalent of 100 bonds=100*5 shares=500 shares

total number of shares=500+500=1,000 shares

If the value of the company is $184,500, debt would account for half of the value since 500 shares(half of the total shares) is the value of debt

value of debt=$184,500*500/1000=$92,250

value of total firm=value of equity-value of debt

$184,500=value of equity+$92,250

value of equity=$184,500-$92,250

value of equity=$92,250

In  the same vein, if the value of the firm is $225,000, the  value of debt is determined thus:

value of debt=$225,000*500/1000

value of debt=$112,500

$225,000=value of equity+$112,500

value of equity=$225,000-$112,500

value of equity=$112,500

It seems that there was an error in option C since the second figure should have been $112,500(not $125,000)

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