Consider a corporation listed on the stock exchange characterized by the following metrics: Equity Value: $150 million Volatility of Equity ( ) = 35% Debt (Principal, ) maturing in one year: $120 million Risk-free interest rate per annum a) Employ Merton's model to compute the likelihood of the corporation defaulting within the forthcoming year. It's assumed the corporation has issued a single zerocoupon bond and will default if its asset value dips below the debt obligation at maturity. b) Craft a diagram that illustrates this default probability in relation to the asset's value. c) Explore the impact on the default probability when there's an increase or decrease in volatility

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a Using Mertons model Equity value V0 150 million Debt v... View the full answer