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  1. business
  2. accounting
  3. consider a company with equity value equal to $80,

Consider a company with equity value equal to $80, and face value of debt of...

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Accounting

Consider a company with equity value equal to $80, and face value of debt of $50. The annual log-return on risk-free debt is 3%. If the debt of the company expires in 0.5 years, how does the probability of default of the company changes as a function of the volatility of the equity?
In excel please.
a. Create a plot where the distance to default is on the y-axes and the volatility of the equity (from 0.1 to 1.5, in increments of 0.1) is on the x-axes. That is, what is the relationship between equity (i.e. stock) volatility and the distance to default of the firm?
b. Create a plot where the probability of default is on the y-axes and the volatility of the equity (from 0.1 to 1.5, in increments of 0.1) is on the x-axes. That is, what is the relationship between equity (i.e. stock) volatility and the probability of default of the firm?
c. Comment the results.

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