In Relating Stockholder Value in Terms of Put Options, the Stockholders

question 20

Multiple Choice

In relating stockholder value in terms of put options, the stockholders own the firm, they owe promised payments to the bondholders, and they have bought a put on the firm's assets with an exercise price equal to the promised payment to the bondholders. If the firm's cash flow is less than these promised payments:

• A) the put is out-of-the-money, is not exercised, and the stockholders retain ownership.
• B) the put is out-of-the-money, is exercised, and the stockholders retain ownership.
• C) the put is in-the-money, is exercised, and the stockholders walk away from their promise to the bondholders.
• D) the put is in-the-money, is exercised, and the stockholders retain ownership.

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