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 (Firm Value - Debt Value) / (Standard Deviation of Firm Value * Debt Value). In this case, the firm value is £1 billion, the debt value is £0.6 billion, and the standard deviation of firm value is 30%. Therefore, the distance to default is (1 - 0.6) / (0.3 * 0.6) = 1.33.

A Firm's Current Value Is £ 1 Billion