PPT Slide

Assumptions in Merton’s firm value model are:

1. Liabilities of firm consist only of a single class of debts;

2. Debt has a zero coupon and no embedded option features;

3. Interest rate is constant;

4. Firm value process follows the geometric Brownian motion;

5. Bankruptcy is costless;

6. Strict priority of claims is preserved in bankruptcy;

7. Bankruptcy is triggered only at bond maturity.

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