The value of a company's equity is $4 million and the volatility of its equity is 60%.
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Question:
The value of a company's equity is $4 million and the volatility of its equity is 60%. The debt that will have to be repaid in two years is $15 million. The risk-free interest rate is 6% per annum.1)UseMerton's model to estimate the probability ofdefault.2)Calculate market value of debt, present value of debt, and theexpected loss fromdefault
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