In Terms of Relating Options to the Value of the Firm

question 28

Multiple Choice

In terms of relating options to the value of the firm, the equity of the firm can be viewed as:

• A) a call option on the firm with the exercise price equal to the promised payments to the bondholders.
• B) a call option on the firm with the exercise price equal to the firm's after-tax cash flow.
• C) a put option on the firm with the exercise price equal to the promised payments to the bondholders.
• D) a put option on the firm with an exercise price equal to the firm's after-tax cash flow.

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Definitions:

Non-Controlling Interest

An ownership interest in a subsidiary held by investors other than the parent company, reflecting their share of the equity and earnings of the subsidiary.

Consolidation Adjustments

Modifications made to combine the financial statements of parent and subsidiary companies into a single set of statements.

Equity

The residual interest in the assets of the entity after deducting all its liabilities.

Pre-Acquisition Entry

An accounting entry made to adjust the values of the acquiree's assets and liabilities to their fair values at the acquisition date before they are consolidated.