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Consider a company described by the following market data: the value of the companys assets...

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Finance

Consider a company described by the following market data: the value of the companys assets is 4.5 million USD, the volatility of the assets is 25%. The debt that has to be paid is in 3 year is 3.5 million USD. The risk free rate is 2.5% per annum. Consider a standard Mertons model

dS(t) = rS(t)dt + S(t)dW(t)

On a 3-year horizon, what is the survival probability of the firm? Remember in Merton's model the firm survives if the value of the assets is greater than the value of debt at time T.

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