Use the Information for the Question(s) Below

question 5

Multiple Choice

Use the information for the question(s) below.
The current price of KD Industries' stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant.
-Which of the following statements is false?

• A) For companies with high debt-to-equity ratios, the approximation that the beta of debt is zero is unrealistic; such corporations have a positive probability of bankruptcy, and this uncertainty usually has systematic components.
• B) When the debt is risky, the firm's equity is always in-the-money; thus Δ = 1.
• C) If we let A be the value of the firm's assets, E be the value of equity, and D be the value of debt, then because equity is a call option on the assets of the firm, E = SΔ + B with A = E + D = S.
• D) Equity can be viewed as a call option on the firm's assets.

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