If you consider the equity of a firm to be an option on the firm's assets then the act of paying off debt is comparable to ________ on the assets of the firm.
A)purchasing a put option
B)purchasing a call option
C)exercising an in-the-money put option
D)exercising an in-the-money call option
E)selling a call option

Question

Quizplus · Accepted Answer

Paying off debt reduces the firm's liabilities, effectively increasing the equity holders' claim on the firm's assets. This is akin to exercising an in-the-money call option, where the holder opts to buy an asset at the strike price, benefiting from the asset's value being higher than the strike price.

If You Consider the Equity of a Firm to Be