I am having a bit of a problem understanding this statement(broken into 3 parts), if you could kindly help me out:
1)Equity holders in effect hold a call option on the corporation’s assets and debt holders can be considered to have written the option.
2)In cases of low financial distress the company maybe considered to be similar to an at-the-money option for its equity holders and they would be willing to undertake risky projects as they would benefit from an increase in profitability, but impact of any loss would be limited.
3)In case of high financial distress the option would be considered out of money.