Which of the following best describes Galt's debt using a put option?

Question

Quizplus · Accepted Answer

A)MV of equity = $20 share × 25 million shares = $500 million
Since the D/E ratio = .4 → Debt/$500 = .4 → Debt = .4(500)= $200 million in debt.
The shareholders are entitled to any residual value after the debt of $200 million is fully repaid.Therefore the strike price is $200 million.Since risky debt = risk-free debt - put option on firm assets we know that we need to be long the risk free debt and short the put.

Which of the Following Best Describes Galt's Debt Using a Put