A share of stock is a ________ option on the value of 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
E)put option,market value of debt

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 at the price of the debt's face value. If the firm's assets are worth more than the debt, shareholders will exercise this option; if not, the option expires worthless, and the firm goes to the bondholders.

A Share of Stock Is a ________ Option on the Value