A firm's current value is $£$ 1 billion .The firm has one-year zero-coupon debt outstanding with a face value of $£$ 0.6 billion.What is the one-year "distance to default" (in the Moody's KMV approach)if the standard deviation of firm value is 30%?
A)1.33
B)1.71
C)2.34
D)3.12

Question

Quizplus · Accepted Answer

The distance to default is calculated as $(\text{Firm Value} - \text{Debt}) / (\text{Firm Value} \times \text{Standard Deviation})$. Here, it is $(1 - 0.6) / (1 \times 0.3) = 1.33$.

A Firm's Current Value Is £££ 1 Billion £££ 06 Billion

A Firm's Current Value Is $£$ 1 Billion $£$ 06 Billion