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Explain the logic underpinning the assertion in Merton’s model that the equity holders of an indebted...

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Finance

Explain the logic underpinning the assertion in Merton’s modelthat the equity holders of an indebted firm can be considered ashaving a call option on the assets of the firm, with an exerciseprice equal to the face value of the debt.

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In the call option it is very important to understand that only when the stock price at maturity is above the exercise price then only the investor with a call option will exercise the contract otherwise will let the    See Answer
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Explain the logic underpinning the assertion in Merton’s modelthat the equity holders of an indebted firm can be considered ashaving a call option on the assets of the firm, with an exerciseprice equal to the face value of the debt.

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