A is correct. Applying the Merton model, first calculate the value of equity (S), expressed as follows:

E = V*N(d₁) − De⁻ʳᵀN(d₂)

where:

• V = CAD 85 million = market value of assets
• N(d₁) = 0.9495
• N(d₂) = 0.8983
• D = CAD 55 million = face value of the zero-coupon bond
• e⁻ʳᵀ = e⁻⁰·⁰⁵ײ = 0.9048

Thus,

E = (85,000,000)(0.9495) − (0.9048)(55,000,000)*(0.8983) = 80,707,500 − 44,703,001 = CAD 36,004,499.

Therefore,

Market value of debt = V − E = 85,000,000 − 36,004,499 = CAD 48,995,501

B is incorrect. CAD 49,764,000 is the face value of debt discounted over 2 years.

C is incorrect. CAD 53,699,000 is the result obtained if the discount factor (e⁻ʳᵀ) in the formula for equity value is not applied.

D is incorrect. CAD 54,056,000 is the result obtained if N(d₂) in the formula for equity value is not applied.