When a Firm in Financial Distress Accepts Very Risky Projects

Multiple Choice

When a firm in financial distress accepts very risky projects, the stockholders benefit at the expense of the bondholders. In terms of option theory, the gain to the stockholders occurs because:

A) the stock is a put option on the firm's assets, and risky projects decrease the exercise price of the option.
B) the stock is a put option on the firm's assets, and risky projects increase the exercise price of the option.
C) the stock is a call option on the firm's assets, and risky projects increase the volatility of those assets.
D) the stock is a call option on the firm's assets, and risky projects decrease the volatility of those assets.