Suppose there is a large probability that L will default on its debt. For the purpose of this example, assume that the value of L's operations is $4 million (the value of its

debt plus equity). Assume also that its debt consists of 1-year, zero coupon bonds with a face value of $2 million. Finally, assume that L's volatility, , is 0.60 and that the

risk-free rate is 6%