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To capture the remaining default risk, we also propose to look at the firm's market value at the time of default. Perfect market behavior implies that, prior to default, the share price of a firm will fall by an amount large enough to reflect the increased riskiness of default as perceived by the marginal investor.
The larger the default premium, the lower the market price of the stock. Therefore, we would expect a strong negative correlation between the probability of default and the firm stock price. Because the firm value will vary with its size, we adjust the market value by the firm book value. The market-to-book ratio provides an indication of how investors perceive the firm. Institutions with relatively high rates of return on equity generally sell at higher multiples of book than those with low returns. In short, the lower the market value relative to book, the higher the probability of default.

Valuation

The model:

10 Year G Sec Bond yield + Default rates for securities of this Nature World wide (Altman) + Value at risk Margin +Spread over BBB security - [Rating Transition Probability *364 day Tbill Rate]
Given;