From your reading, recall that in structural model, company equity is similar to a call option on the company's assets with a strike price equal to the payoff value of the debt.

Assume that you know the following about a company:

$\backslash$table$[[\backslash$table$[[$Current asset value$],[($millions$)]],705],[\backslash$table$[[$Expected return on$],[$assets$]],3\mathrm{.}7],[$Risk free rate,$1\mathrm{.}9],[\backslash$table$[[$Face value of debt$],[($millions$)]],586],[\backslash$table$[[$Time to debt$],[$maturity$]],4],[\backslash$table$[[$Asset return$],[$volatility $($stdev$)]],0\mathrm{.}3]]$

Using the option pricing model, what is the probability of default over the debt's time to maturity? Enter answer in percents.

Answered

orrect Answer

$39\mathrm{.}93$ margin of error $\frac{+}{.}1\%$