Consider a firm that has an asset value of $$140.$ The firm's sole debt issue is a bond with one $6\%$ annual coupon left to be paid in one year along with the principal at the maturity of the bond. The

parameters are:

firm's current asset value.A$\_$t$=140$

Nominal value of debt,D$=100$

Coupon on debt, c$=0\mathrm{.}06$

Asset volatility, sigma$\_$A$=0\mathrm{.}25$

Debt maturity in years,T$-$t$=1$

Risk free rate, r$=0\mathrm{.}05$

Return on firm's assets, a $=0\mathrm{.}10$

$($i$)$ Describe the action to be taken by shareholders$/$debt holders at maturity for the case when the asset value exceeds the debt and vice versa $($Hint: Merton Mdel$).$

$($ii$)$ Calculate the probability of default.