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If debt and equity can be modeled as options on the firm’s assets, then the strike...

If debt and equity can be modeled as options on the firm’s assets, then the strike price of these options is

a. Price of the bond

b. Value of the firm

c. Face value of debt

Under risk-neutral probability of default, a risk-neutral investor will pay __________ price for the risky asset _____ a risk-averse investor will pay under physical probability

a.

higher than
b.

lower than
c.

the same as
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Answer #1

1. When the debt and equity can be modelled as options on the firm asset, then the strike price of the option will be value of the firm because value of the firm will be representing the the strike price at which these options are to be exercised.

Correct answer will be option (A) Value of the firm

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