1. When a firm in financial distress accepts very risky projects, the shareholders benefits at the expense of the bondholders. In terms of real option theory, the gain to the shareholders occurs because

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1. The stock is a put option on the firms assets, and risky projects decrease the exercise price of the option
2. The stock is a put option on the firms assets, and risky projects increase the exercise price of the option
3. The stock is a call option on the firms assets, and risky projects increase the volatility of those assets
4. The stock is a call option on the firms assets, and risky projects decrease the volatility of those assets