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XXX Ltd. has banked with Bank of Australia for more than 10 years. XXX Ltd. woul...
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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).
Balance Sheets | ||
As at end of Year |
| 2019 |
| $ million | |
Current Assets |
|
|
| Cash | 50 |
| Debtors | 150 |
| Stock | 240 |
Current Liabilities |
|
|
| Creditors | 120 |
| Hire Purchase | 50 |
| Bank Overdraft | 160 |
| Directors' Loans | 14 |
| Current Tax | 1 |
Net Current Assets |
| 95 |
Fixed Assets |
|
|
| Freehold Building | 120 |
| Plant & Machinery | 150 |
Long Term Liabilities |
|
|
| Mortgage Loan | 150 |
| Deferred Taxation | 15 |
| Corporate Bonds | 60 |
Net Long Assets |
| 45 |
|
|
|
Net Assets |
| 140 |
Financed by: |
|
|
| Issued Share Capital | 100 |
| Profit and Loss Account | 40 |
| Total Capital | 140 |
Profit & Loss Account Summary |
| |
| Sales | 1300 |
| Cost of Goods Sold | 1050 |
| including Credit Purchases | 800 |
| Gross Profit | 150 |
| EBIT | 74 |
| Interest | 10 |
| Net Profit before Tax | 60 |
Table 2 Expected Default Frequency from Moody’s | |
Distance to default | Expected Default Frequency |
1 | 50% |
2 | 35% |
3 | 10% |
4 | 5% |
5 | 2% |
6 | 1% |
7 | 0.1% |
8 | 0.05% |
9 | 0.01% |
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?