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1. How do you interpret the numerous outputs available from the Merton Default Model for each airline company.

Merton Probability of Default Model ALASKA AIRLINES - Merton Default Model Company Ticker ALK Firm Value $14.43 V(0) Result of analysis Firm Volatility 15.563796 s(V) Result of analysis Debt at T $67451 D(T) Input: Bond documents Interest Rate (CC) 1.55000% y'(T) Input: Debt market, "risk-free" interest rate or base rate Time to Maturity 5.0000 T Input: Weighted average duration of liabilities Dividend Yield 0.0000% dy Input: Analysis of company Equity Volatility 27.270096 s(E) Input: Options market Equity Value $8.1930 E(0,Actual) Input: Equity market, number of shares outstanding times current share price OUTPUT Equity Value (Model) $8.193033 E(0,Merton) Output: BSM OVM, equity as option Equity Value (Vol) 58.193021 E(0,Vol) Output: BSM OVM, equity volatility is volatility of option Solver $0.00 =[E(0,Merton)-E(0,Actua|)]"2+[E(0,Vo|)E(0,Actual)]"2 Probability of Default 1.27677% p(T) N[-d(2)] Debt at 0 $6.23 D(O) V(0) - E(O) Debt Yield 1.58% y(T) |n[D(T)/D(0)] /T Credit Spread (bps) 2.78 cs(bps) [y(T) y"(T)]*10000 Promised Debt Payment $6.24 6(0) D(T) * exp(y*(T)T) Expected Debt Loss 0.14% EDL [6(0) D(0)]/G(0) Expected Recovery 89.11% R [p(T) EDL]/p(T) Distance to Default 2.23321 DD d(2), measured in standard deviations Notes: Volatility of rm: = Equity Volatility * Equity Value/ [N(d1)*Firm Value] Implied equity value (vol based) = [N(d1)'Firm Volatility'Firm Value]/Equity Volatility DAL current dividend: 2.0300% equity volatility (30 day at the $ calls): 27.2700% stock price: 66.61 shares outstanding: 123.00 current liabilities: 2,942.00 non-current liabilities: 2 602.00 5,544.00 833- rated debt assumption: 4.0000% 6,745.12 Merton Probability of Default Model DELTA AIRLINES - MERTON DEFAULT MODEL Company Ticker DAL Firm Value $91.65 V(0) Result of analysis Firm Volatility 7.6267% s(V) Result of analysis Debt at T $56.6705 D(T) Input: Bond documents Interest Rate (CC) 1.55000% y*(T) Input: Debt market, "risk-free" interest rate or base rate Time to Maturity 5.0000 T Input: Weighted average duration of liabilities Dividend Yield 0.0000% dy Input: Analysis of company Equity Volatility 17.8200% s(E) Input: Options market Equity Value $39.2112 E(0, Actual) Input: Equity market, number of shares outstanding times current share price OUTPUT Equity Value (Model) $39.211108 E(0, Merton) Output: BSM OVM, equity as option Equity Value (Vol) $39.211130 E(0, Vol Output: BSM OVM, equity volatility is volatility of option Solver $0.00 =[E(0,Merton)-E(0,Actual)]^2+[E(0, Vol)-E(0,Actual)]^2 Probability of Default 0.07156% P(T) N[-d(2)] Debt at 0 $52.44 D(0) V(0) - E(0) Debt Yield 1.55% y(T) In [D(T)/D(0)] / T Credit Spread (bps) 0.07 cs(bps) [y(T) - y*(T)]*10000 Promised Debt Payment $52.44 G(0) D(T) *exp(-y* (T)T) Expected Debt Loss 0.00% EDL G(0) - D(0)]/G(0) Expected Recovery 95.34% R [P(T) - EDL]/P(T) Distance to Default 3.18828 DD d(2), measured in standard deviations Notes: Volatility of firm: = Equity Volatility * Equity Value / [N(d1)*Firm Value] Implied equity value (vol based) = [N(d1)*Firm Volatility*Firm Value]/Equity Volatility DAL current dividend: 2.8700% equity volatility (30 day at the $ calls): 17.8200% stock price: 56.50 shares outstanding: 694.00 current liabilities: 18,578.00 non-current liabilities: 28,001.00 46,579.00 BBB- rated debt assumption: 4.0000% 56,670.48Merton Probability of Default Model SOUTHWEST AIRLINES (LUV) - Merton Default Model Company Ticker LUV Firm Value $48.21 V(0) Result of analysis Firm Volatility 12.51 19% s(V) Result of analysis Debt at T $19.7024 D(T) Input: Bond documents Interest Rate (CC) 1.55000% y*(T) Input: Debt market, "risk-free" interest rate or base rate Time to Maturity 5.0000 T Input: Weighted average duration of liabilities Dividend Yield 0.0000% dy Input: Analysis of company Equity Volatility 20.1200% s(E) Input: Options market Equity Value $29.9728 E(0,Actual) Input: Equity market, number of shares outstanding times current share price OUTPUT Equity Value (Model) $29.972894 E(0,Merton) Output: BSM OVM, equity as option Equity Value (Vol) $29.972714 E(0, Vol Output: BSM OVM, equity volatility is volatility of option Solver $0.00 =[E(0,Merton)-E(0,Actual)]^2+[E(0, Vol)-E(0,Actual)]^2 Probability of Default 0.04262% P(T) N[-d(2)] Debt at 0 $18.23 D(0) V(0) - E(0) Debt Yield 1.55% y(T) In [D(T)/D(0)] / T Credit Spread (bps) 0.05 cs(bps) [y(T) - y*(T)]*10000 Promised Debt Payment $18.23 G(0) D(T) *exp(-y* (T)T) Expected Debt Loss 0.00% EDL G(0) - D(0)]/G(0) Expected Recovery 94.38% R [P(T) - EDL]/P(T) Distance to Default 3.33517 DD d(2), measured in standard deviations Notes: Volatility of firm: = Equity Volatility * Equity Value / [N(d1)*Firm Value] Implied equity value (vol based) = [N(d1)*Firm Volatility*Firm Value]/Equity Volatility LUV current dividend: 1.2500% equity volatility (30 day at the $ calls): 20. 1200% stock price: 57.64 shares outstanding: 520.00 current liabilities: 7,905.00 non-current liabilities: 8,485.00 16,390.00 BBB+ rated debt assumption: 3.7500% 19,702.42