Debt holders can be thought of as owning the firm but having ________ a call option on the assets of the firm with a strike price equal to ________.
A) written, face value of debt
B) bought, face value of debt
C) written, value of equity
D) bought, value of equity

Question

Quizplus · Accepted Answer

Debt holders can be thought of as having written a call option on the firm's assets because if the firm's assets exceed the debt's face value, equity holders (option holders) can "call" the firm's assets by paying off the debt. The strike price in this analogy is the face value of the debt, which is the amount needed to be paid to satisfy the debt holders' claim.

Debt Holders Can Be Thought of as Owning the Firm