CFA Practice Question

CFA Practice Question

A debt covenant requires a firm to not exceed a debt to equity (both book values) ratio of 40%. The debt of the firm is constant at $8 million. You estimate that equity at the end of the year is a continuous random with the range of $16 million to $32 million. According to this estimate, what is the probability of the debt covenant being breached?
A. 25%
B. 50%
C. 75%
Explanation: Covenant is breached when equity falls below $20 million.

User Contributed Comments 2

User Comment
tijean25 How do you get 25% from that?
ryanp1 they violate if equity falls between 16-20. Total range of the random variable is 16. 4/16=25%
You need to log in first to add your comment.