Debt holders can be thought as owning the firm but having ________ a call option on the assets of the firm with an exercise price equal to the ________.
A)sold, value of equity
B)bought, face value of debt outstanding
C)bought, value of equity
D)sold, face value of debt outstanding

Question

Quizplus · Accepted Answer

Debt holders can be thought of as owning the firm but having sold a call option on the assets of the firm with an exercise price equal to the face value of the debt outstanding. This is because if the firm's assets exceed the debt, equity holders will "exercise" their option to take the residual value after debt is paid.

Debt Holders Can Be Thought as Owning the Firm but Having