Based on your understanding of structural models of default, equity holders are better off when, holding all else constant
A) The volatility of the firm's assets increases.
B) The value of the firm's assets decreases.
C) The debt maturity is shorter.
D) All of the above.

Question

Quizplus · Accepted Answer

Equity holders can be viewed as holding a call option on the firm's assets, with the strike price being the value of the debt. An increase in the volatility of the firm's assets increases the value of this option, benefiting equity holders.

Based on Your Understanding of Structural Models of Default, Equity