PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 23, Problem 14PS
Summary Introduction
To determine: The probability that the company default.
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Students have asked these similar questions
9(b) You may assume the Merton model for credit risk holds true for this question. A companyhas fixed debt of £45 million with term two years, the current value of the company’sassets is £52 million. The risk-free rate of return is 4.5% per annum continuouslycompounded, the assets of the company follow geometric Brownian motion with volatility25% per annum and there are no other dividends or interest payments. Calculate the riskneutral probability of default.
Suppose the estimated linear probability model used by an FI to predict business loan applicant default probabilities is PD = .03X1+ .02X2 - .05X3+ error, where X1 is the borrower's debt/equity ratio, X2is the volatility of borrower earnings, and X3= 0.10 is the borrower’s profit ratio. For a particular loan applicant, X1= 0.75, X2= 0.25, and X3= 0.10.
Required:
What is the projected probability of default for the borrower?
What is the projected probability of repayment if the debt/equity ratio is 2.5?
Show the monthly return of the company and S&P 500 in the same graph. What is
your interruption interpretation of the change of return of the company comparing
with the market index?
Calculate the monthly standard deviation and return for both the company and
S&P 500. What is your interruption of the risk and return of the company comparing
with the market index?
S&P 500 last 6 months :
Date
Open
High
Low
Close*
Adj. close**
Volume
01 Apr 2022
4,540.32
4,593.45
4,381.34
4,392.59
4,392.59
37,024,560,000
01 Mar 2022
4,363.14
4,637.30
4,157.87
4,530.41
4,530.41
100,978,320,000
01 Feb 2022
4,519.57
4,595.31
4,114.65
4,373.94
4,373.94
73,167,790,000
01 Jan 2022
4,778.14
4,818.62
4,222.62
4,515.55
4,515.55
73,279,440,000
01 Dec 2021
4,602.82
4,808.93
4,495.12
4,766.18
4,766.18
68,699,830,000…
Chapter 23 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 23 - Expected yield You own a 5% bond maturing in two...Ch. 23 - Bond ratings In February 2018, Aaa bonds yielded...Ch. 23 - Bond ratings It is 2030 and the yields on...Ch. 23 - Prob. 4PSCh. 23 - Default option Other things equal, would you...Ch. 23 - Prob. 6PSCh. 23 - Prob. 7PSCh. 23 - Default option Digital Organics has 10 million...Ch. 23 - Prob. 9PSCh. 23 - Prob. 10PS
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