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 2 years is $15 million. The risk-free interest rate is 6% per annum. Use Merton's model to estimate the expected loss from default, the probability of default, and the recovery rate in the event of default. Explain why Merton's model gives a high recovery rate. (Hint: The Solver function in Excel can be used for this question.)

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