The enterprise value of the Maxcourage Corporation is $130 million. The company has issued a zero-coupon bond with a face value of $100 million which expects to mature in five years. The expected rate of change of the firm's value is 25%. The firm's assets have an annual volatility (standard deviation) of 30%. Assume that firm value is lognormally distributed, with constant volatility. You are required to estimate the distance to default using the Merton model. 

What are/is the main limitation/s of the Merton model? Explain?

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The Merton model also known as the structural credit risk model is a widely used model for estimating a firms distance to default the probability of d... View the full answer