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**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.

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**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% |