Explanation

In the KMV model:

Default Point Calculation:

• Default point = Short-term debt + 0.5 × Long-term debt
• Default point = 500 + 0.5 × 300 = 500 + 150 = 650

Distance to Default Calculation:

• Distance to Default = (Market value of assets - Default point) / (Market value of assets × Asset volatility)
• Distance to Default = (1200 - 650) / (1200 × 0.10) = 550 / 120 = 4.5833 ≈ 4.58

Verification:

• Option A: Default point 800 is incorrect (should be 650)
• Option B: Distance to default 7.50 is incorrect (should be 4.58)
• Option C: Default point 650 and distance to default 4.58 - CORRECT
• Option D: Default point 500 is incorrect (should be 650)

The KMV model uses a specific formula where the default point is calculated as short-term debt plus half of long-term debt, and the distance to default measures how many standard deviations the firm's assets are above the default point.