Question: 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

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:

Current asset value (millions) 852
Expected return on assets 4.0
Risk free rate 1.5
Face value of debt (millions) 516
Time to debt maturity 3
Asset return volatility (stdev) 0.44

Using the option pricing model, what is the probability of default over the debt's time to maturity?

Correct Answer: 33.18

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