a. Calculate the Distance to Default (DtD) for each company and compare the results. Explain the main drivers of DtD based on the information available in the above table. Which company is the most risky?

b. Where: WC/TA is Working capital/Total assets

RE/TA is Retained earnings/Total assets

EBIT/TA is Earnings before interest and taxes/Total assets ME/TL is market value of equity/Total liabilities

S/TA is Sales/Total assets

The following information is provided for the three limited liability companies. Calculate the probability of default for each company.

c. Discuss the relationship between DtD and probability of default. Is the relationship for your answers in part (a) and part (b) as expected?

QUESTION 3 ANSWER ALL PARTS a. The following information is given for three limited liability companies: Asset value Asset volatility Asset drift rate Short-term liabilities Long-term liabilities Company A 45,326 23.70% 3.80% 10,589 24,856 Company B 42,115 25.80% 3.70% 8,965 9,568 Company C 39,655 23.90% 3.90% 7,506 2,538 Calculate the Distance to Default (DtD) for each company and compare the results. Explain the main drivers of DtD based on the information available in the above table. Which company is the most risky? (40% question weight) b. The following logit model has been produced to calculate the probability of default of corporate firms. Constant -3.28 WC/TA 0.32 RE/TA -1.70 EBIT/TA -8.25 ME/TL -0.14 S/TA 0.74 Coefficient Where: WC/TA is Working capital/Total assets RE/TA is Retained earnings/Total assets EBIT/TA is Earnings before interest and taxes/Total assets ME/TL is market value of equity/Total liabilities S/TA is Sales/Total assets The following information is provided for the three limited liability companies. RE/TA 0.23 Company A Company B Company C WC/TA 0.45 0.50 0.55 EBIT/TA 0.03 0.04 0.05 ME/TL 0.80 0.96 S/TA 0.25 0.33 0.33 0.31 0.32 1.06 Calculate the probability of default for each company. (50% question weight) c. Discuss the relationship between DtD and probability of default. Is the relationship for your answers in part (a) and part (b) as expected? (10% question weight) QUESTION 3 ANSWER ALL PARTS a. The following information is given for three limited liability companies: Asset value Asset volatility Asset drift rate Short-term liabilities Long-term liabilities Company A 45,326 23.70% 3.80% 10,589 24,856 Company B 42,115 25.80% 3.70% 8,965 9,568 Company C 39,655 23.90% 3.90% 7,506 2,538 Calculate the Distance to Default (DtD) for each company and compare the results. Explain the main drivers of DtD based on the information available in the above table. Which company is the most risky? (40% question weight) b. The following logit model has been produced to calculate the probability of default of corporate firms. Constant -3.28 WC/TA 0.32 RE/TA -1.70 EBIT/TA -8.25 ME/TL -0.14 S/TA 0.74 Coefficient Where: WC/TA is Working capital/Total assets RE/TA is Retained earnings/Total assets EBIT/TA is Earnings before interest and taxes/Total assets ME/TL is market value of equity/Total liabilities S/TA is Sales/Total assets The following information is provided for the three limited liability companies. RE/TA 0.23 Company A Company B Company C WC/TA 0.45 0.50 0.55 EBIT/TA 0.03 0.04 0.05 ME/TL 0.80 0.96 S/TA 0.25 0.33 0.33 0.31 0.32 1.06 Calculate the probability of default for each company. (50% question weight) c. Discuss the relationship between DtD and probability of default. Is the relationship for your answers in part (a) and part (b) as expected? (10% question weight)