Essay Using the Merton’s Structural Model with a One-Year Horizon – Management Assignment Help

Assignment Task:

Task:

Assignment
Using the Merton’s structural model with a one-year horizon, calculate the probability of default (using both the iterative approach and two-equation approach) for two US non-financial firms between Q1 2017 and Q4 2017 (i.e. a full calendar year). Compare the results and describe your calculations.

To complete this assignment you should,
1. Download the following information between Q1 2017 and Q4 2017 for each firm:
a. the daily equity price and amount of common shares in circulation (to calculate the market equity),
b. the quarterly total book liabilities.

2. Download the daily S&P 500 index price for the Q1 2017 to Q4 2017 period.

3. Assume the risk free rate to be 3% throughout the whole period.

4. For each firm, calculate the probability default (using both the iterative approach and two-equation approach) using the Merton’s structural model with a one-year horizon. As part of your calculations you will need to:
a. Calculate the asset volatility,
b. Perform CAPM calculations,
c. Derive the implied default probability,
d. Calibrate the Merton model.

5. In your report, you will need to:
a. briefly describe the two firms, including industry, overall structure, and performance over the period,
b. explain and briefly describe the data feeding into the model and how it is used,
c. describe the calculations performed in the Excel workbook,
d. compare and explain the different approaches for calculating the probability of default;
i. iterative approach,
ii. two-equation approach
e. interpret the output of the Merton model and describe key parameters of the model,
f. Compare the probability of default results for the two firms.