Debt Holders Can Be Thought of as Owning the Firm

question 65

Multiple Choice

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

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Definitions:

Scrap Value

The estimated resale value of an asset at the end of its useful life, also known as salvage value.

Units-Of-Production Method

An approach to depreciation that allocates the cost of an asset over its useful life based on its output or usage, rather than the passage of time.

Scrap Value

The estimated resale value of an asset after its useful life is over and it can no longer be used as intended.

Double-Declining-Balance

A method that determines a depreciation amount for the first year that is approximately twice the straight-line rate.