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The value of a company's equity is $2.5 million and the volatility of the equity is 50%. The debt that will have to be paid
The value of a company's equity is $2.5 million and the volatility of the equity is 50%. The debt that will have to be paid in three years is $10 million. The risk-free interest rate is 2.5% per annum. 1. What is the difference between risk-neutral versus real-world probabilities? 2. Use Merton's model to estimate the probability of a default on the debt in the next three years
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