ABC Ltd. is in financial distress and has two loans outstanding: one loan borrowed from Monash Bank with an amount of  $40 million, the second loan with an amount of 25 million is from a senior bank whose payment will arrive before clearing the debt of Monash Bank.  If ABC Ltd. wants to liquidate and default on its loans, the liquidation value is $30 million. If the company continues its business, the special skills of ABC Ltd.’s management will lead to a pay-off of $70 million with a probability of 0.7, otherwise zero. For the management to continue, ABC Ltd. would have to be paid $5 million.

Which of the following statement(s) is(are) true?

Which of the following(s) is(are) not the weakness of the KMV model?

Which of the following statement(s) is(are) true?

Which of the following statement(s) is(are) true with respect to the pricing loan model?

With respect to the KMV model, which of the following statement(s) is(are) true?

Which of the following statement(s) is(are) true?

King Builder specialized in office building construction for more than 10 years,  has been banking with Banks of Australia for over 5 years.  It has been recently been awarded a contract to build an office building for JP Morgan.  The total contract price is $130 million and the construction length will be 13 months.  It is expected that labor costs and material costs will be 60 percent and 40 percent of costs, respectively.  It is estimated that this builder will make a profit of twenty-five (25) percent of the contract value. 

As this is a relatively straightforward project for King Builder, it is safe to assume that construction progress will be spread evenly over the life of the project.  Assume that monthly certificates will be issued at the end of the month and payments will occur 25 days after the issue of each certificate.

A retention fund has been set up which will require retentions at the rate of 5 percent of the monthly payments and a minimum level 7 percent of the total contract value at the beginning of the construction.  As a well-established builder, King Builder expects no difficulties in obtaining two-month credit terms from the suppliers of the necessary construction materials. 

What’s the total cashflow out of this builder at the end of the second month?

XXX Ltd. has banked with Bank of Australia for more than 10 years. XXX Ltd. would like to apply for a $ 10 million loan from the Bank of Australia and provides the following balance sheet report to the bank (in Table 1).  It’s estimated that XXX Ltd. will have a growth rate of 25% in the coming year.  The bank is provided the Expected Default Frequency Table from Moody (in Table 2).

Suppose that the borrower’s future market values of assets follow a normal distribution with a mean 2250 million and a standard deviation of 12%.  What’s the Expected Default Frequency of this borrower under the KMV model?

Which of the following statement(s) is (are) true? 

ABC Ltd. has banked with Bank of Australia for more than 10 years. ABC Ltd. would like to apply for a $ 10 million loan from the Bank of Australia and provides the following balance sheet report to the bank.

Under the KMV model, what’s the default point of this borrower?