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 is calculated as (Value of the firm - Face value of debt) / Standard deviation of firm asset value. Here, it is ($10 billion - $7 billion) / $2 billion = 1.50.

A Firm's Current Value Is $10 Billion