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Consider a company with equity value equal to $ 8 0 , and face value of debt of $ 5 0 . The annual log
Consider a company with equity value equal to $ and face value of debt of $ The annual logreturn on riskfree debt is If the debt of the company expires in years, how does the probability of default of the company changes as a function of the volatility of the equity?
In excel please.
a Create a plot where the distance to default is on the yaxes and the volatility of the equity from to in increments of is on the xaxes. That is what is the relationship between equity ie stock volatility and the distance to default of the firm?
b Create a plot where the probability of default is on the yaxes and the volatility of the equity from to in increments of is on the xaxes. That is what is the relationship between equity ie stock volatility and the probability of default of the firm?
c Comment the results.
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