Why do a firms stockholders hold a valuable default option, Finance Basics

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Why do a firms stockholders hold a valuable default option

1. Why do a firm's stockholders hold a valuable "default option"? How could this option induce stockholders to employ high levels of financial leverage?

2. All else equal, which firm would face a greater level of financial distress, a software-development fi rm or a hotel chain? Why would financial distress costs affect the firms so differently?

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Finance Basics: Why do a firms stockholders hold a valuable default option

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