Answer: 650 | 4.58

## 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.

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