A share of stock is a ________ option on the assets of the firm with a strike price equal to ________.
A) put option, face value of debt
B) call option, market value of equity
C) call option, face value of debt
D) put option, market value of equity

Question

Quizplus · Accepted Answer

A share of stock can be viewed as a call option on the firm's assets, with the strike price being the face value of the firm's debt. This is because shareholders have the right but not the obligation to "buy" the firm from the bondholders by paying off the firm's debt, essentially the strike price, to claim its residual assets.

A Share of Stock Is a ________ Option on the Assets