Consider Two Firms with One-Year Probabilities of Default Of $$p _ { 1 } = 0.10$$

question 24

Multiple Choice

Consider two firms with one-year probabilities of default of $$p _ { 1 } = 0.10$$ and $$p _ { 2 } = 0.05$$ ,respectively.The correlation of default of these two firms is $$\rho = 0.30$$ .What is the probability that both firms default in one year?

• A)1.0%
• B)1.5%
• C)2.0$
• D)2.5%

---

Definitions:

Earnings Per Share

Earnings per share (EPS) is a financial metric that represents the portion of a company's profit allocated to each outstanding share of common stock, indicating the company's profitability.

Excess Cash

The amount of cash holdings that exceed the normal operational needs of a company.

Stock Repurchase

A business operation where a company repurchases its shares from the market, leading to a decrease in the total number of shares available.

Repurchase

Another method used to pay out a firm’s earnings to its owners, which provides more preferable tax treatment than dividends.