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

question 55

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 greater 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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Definitions:

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Technological Advance

The process of improving or developing new methods, tools, or products to increase efficiency, productivity, or quality in various fields, especially economics and industry.

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