Verma Violin Manufacturing Corporation Has Issued Debt with $10 Million

Multiple Choice

Verma Violin Manufacturing Corporation has issued debt with $10 million of principal due. In terms of viewing the equity of the firm as a call option, what happens to the equity of the firm if the cashflow of the firm is less than $10 million?

A) The option is in-the-money and the stockholders earn the difference between the cash flow and the bondholder's promised payment.
B) The option is in-the-money and the bondholders earn the entire cash flow.
C) The option is out-of-the-money, the stockholders walk away, and the bondholders receive the entire cash flow.
D) The option is out-of-the-money, and the stockholders make up the difference so that the bondholders receive full payment.