Expected ROA

16%

STD DEV ROA

4%

Assets

$8,000 M

Interest rate

12%

Debt

$2,000 M

Table 1. Given information

Note: if a probability is less than the smallest number on the chart, just

answer the question "< 0.10%" (smallest value on the chart) or you can find

the probability using Excel.

1. What is the probability of Coverage Ratio (CR) < 1.0?

2. What is the probability of a CR < 3.0

3. What is the maximum amount of debt the company can service and

have a 3% probability that the coverage ratio will fall to 1.0 or less?

4. What is the maximum amount of debt the company can service and

have a 10% probability that the coverage ratio will fall to 1.0 or less?

5. If the interest rate on debt is 14% instead of 12% and all other values

in Table 1 are in effect, what is the probability of having a coverage

ratio less than 1.0?

6. If the interest rate is 14%, what debt ratio corresponds to a probability

of a CR < 1 of 15%?

7. What is the probability that the company's EBIT will be 0 or less? (hint:

an EBIT of 0 corresponds what value for ROA? Calculate a Z-score for

that ROA)