KMV

[NNath]

If we are using the KMV model and Long Term Debt (LT) / Short Term Debt (ST) > 1.5 then the threshold is equal to

ST + (0.7 - 0.3 *ST /LT) as per ppt below.

Is this correct or should it be

Threshold = ST + (0.7 - 0.3 *ST /LT) * LT

 

[Mkaim]

Hi @NNath,

See the excerpt from the book below. The output of the brackets/parentheses has to be multiplied by the LT value as you show in the final line, otherwise you're basically not factoring LT debt in at all. If the LT/ST ratio is less than 1.5 then ST+Half of LT debt otherwise ST Debt + (.7 - .3 ST/LT) * LT Debt.

 

[David Harper CFA FRM]

Hi @NNath You are correct, that's a typo. Apologies!