Statement that equity is call option on the firm assets

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1. Explain the rationale behind the statement that equity is a call option on the firm’s assets. When would a shareholder allow the call to expire?

2. You buy a machine worth $200,000 and finance it with a debt/equity ratio of 3. The debt is in the form of a term loan. You need to make equal annual payments of $30,080 for the next 8 years in order to fully repay the term loan. What is the interest rate on the loan?

Reference no: EM131983297

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