A firm's current value is $10 billion. The firm has one-year zero-coupon debt with face value $7 billion. The standard deviation of firm asset value is $2 billion. What is the firm's "distance-to-default" as measured by the Moody's KMV approach?
A) 1.50
B) 2.00
C) 3.00
D) 7.00

Question

Quizplus · Accepted Answer

The "distance-to-default" in the Moody's KMV approach is calculated as the difference between the firm's current value and the debt's face value, divided by the standard deviation of the firm's asset value. Here, it is ($10 billion - $7 billion) / $2 billion = $3 billion / $2 billion = 1.50.

A Firm's Current Value Is $10 Billion