A Share of Stock Can Be Thought of as a Call

question 22

True/False

A share of stock can be thought of as a call option on the assets of the firm with a strike price equal to the face value of debt.

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Definitions:

Financial Instruments

Contracts that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Debt Issue Costs

Expenses incurred when a company issues debt, such as bonds, including legal, underwriting, and registration fees.

An Expense

Costs incurred by a business in the process of earning revenue, directly impacting the company's net income.

Amortization Of Discount

The process of gradually recognizing the discount on bonds payable as interest expense over the life of the bond.