Consider a firm with current asset value of $20 billion, asset volatility of 35% per annum, short-term liabilities of $12 billion and long-term liabilities of $6 billion. The expected return on the firm's assets is 12% and the risk-free rate is 1%. Finally, the firm does not pay dividends and the credit horizon is 1 year. If the strike price default point is the sum of short-term debt plus one-half of long-term debt, what is the Merton physical probability of default in one year? | Financial Risk Manager Part 2 Quiz