You are the newly appointed Credit Risk Analyst at Banking Corp. Australia. Your task is to evaluate the credit risk of SIA using the Merton model for estimating the probability of default using Excel for one of your major clients.

SIAs equity is valued at $5 million. Equity volatility is 45%. SIA's debt is $10 million and is expected to be paid in one year. The risk-free interest rate is 6% per annum.

The probability of default is

a.

None of the other answers provided is correct

b.

1.856%

c.

2.880%

d.

0.411%

e.

0.033%