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

Question

Quizplus · Accepted Answer

C)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.We can think of the debt holders as being long in the firm ($700 million in assets)and having sold (short)a call option with a $200 strike price.

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