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A company has assets worth $366.11 million. It has debt with a total face value of...

A company has assets worth $366.11 million. It has debt with a total face value of $205.4 million. If the risk-free interest rate is 2.25% and the standard deviation of monthly returns on the company’s stock is 0.188, what is the likelihood the company will be unable to repay the debt in three years when it is due?

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Answer #1

We will solve this using the Black Scholes equation.

N(-d2) is used to estimate the PD of a firm. It is a measure of probability default

where di = d2 = d1 - ovt

Please see the snapshot from my excel model.

1 X V for =C8*C16-C11*EXP(-C12*C9)*C17 7 Inputs 8s gt 10 O 11 K 12r 13 Output 14 di 15 d2 16 17 N(-d2)= 366.11 Asset value 3the likelihood the company will be unable to repay the debt in three years when it is due = N (-d2) = 0.034421 = 3.44%

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