Webster United Movers has a $10,000 debt due in six months. If the value of the firm's assets six months from now is $8,500, the shareholders will in essence:

Question

Quizplus · Accepted Answer

DIf the value of the firm's assets is less than the debt due, the shareholders can choose not to pay the debt, effectively letting the firm go into default. This situation is akin to allowing a call option to expire worthless (C) because the shareholders have the option (but not the obligation) to "buy" the firm by paying off its debts and keeping it running. If the firm's value is less than the debt, it's not in their interest to do so. Similarly, it's like allowing a put option to expire (D) because the shareholders, in essence, have the right to "sell" the firm to its creditors by defaulting on the debt, but since they don't have to exercise this option (as it's already out of the money), it expires.

Webster United Movers Has a $10,000 Debt Due in Six