The Merton (1974) model assumes that the value of the firm is distributed
A) Normally.
B) Lognormally.
C) Exponentially.
D) None of the above.

Question

Quizplus · Accepted Answer

The Merton model assumes that the value of the firm follows a lognormal distribution. This distribution is commonly used in finance to model the prices of assets over time, where the logarithm of the prices follows a normal distribution.

The Merton (1974) Model Assumes That the Value of the Firm