The current value of the assets of Oshakati Meat Corporation is R$220$m$.$

The assets are financed by a mix of equity and zero coupon debt. The current

value of zero coupon debt is R$70$m and the final amount to be paid on

maturity after $7$ years is R$150$m$,$ with an effective interest rate of $13\%.$ The

volatility in Oshakati Meat Corporations asset value is $25\%.$ The following is

required:

i$.$Compute the PD of Oshakati Meat Corporation based on the Merton

model.

ii$.$what is the impact if the volatility suddenly increases to $30\%?$