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Suppose a firm with a value of $80 million has a bond outstanding with a face value of $100 million that matures in five years. The current interest rate is 5 percent and the volatility of the firm is 20 percent. If the expected return on the firm is 20 percent using the Merton model for probability of default, determine the probability that the firm will default on its debt (PD) and calculate the expected loss given default (LGD).

PD LGD

A.
0.78% $780,000

B.
6.51% $1,086,000

C.
56.50% $16,629,000

D.
2.21% $252,000