In the Merton model, the value of the firm's equity ($E$) is modeled as a European call option on the firm's assets ($V$), with the strike price being the face value of the debt ($K$) and the time to maturity ($T$).

The formula for the market value of equity is: $E = V \times N(d_1) - K \times e^{-rT} \times N(d_2)$

Given the inputs:

• $V = 85$ million
• $K = 55$ million
• $T = 2$ years
• $r = 5\%$ or $0.05$
• $N(d_1) = 0.9495$
• $N(d_2) = 0.8983$

Let's compute $E$: $E = 85 \times 0.9495 - 55 \times e^{-0.05 \times 2} \times 0.8983$ $E = 80.7075 - 55 \times e^{-0.10} \times 0.8983$ Since $e^{-0.10} \approx 0.904837$, $E = 80.7075 - 55 \times 0.904837 \times 0.8983 \approx 80.7075 - 44.7048 = 36.0027$ million.

By the fundamental accounting equation, the market value of the firm's assets equals the sum of the market value of its equity and debt ($V = E + D$). Therefore, the market value of the debt ($D$) is: $D = V - E = 85 - 36.0027 = 48.9973$ million.

Allowing for slight differences due to rounding intermediate steps, the answer closely matches CAD 48.996 million.