Suppose That Debt-Equity Ratio (D/E) and the Sales-Asset Ratio (S/A)

question 53

Multiple Choice

Suppose that debt-equity ratio (D/E) and the sales-asset ratio (S/A) were two factors influencing the past default behavior of borrowers.Based on past default (repayment) experience, the linear probability model is estimated as: PD_i = 0.5(D/E_i) + 0.1(S/A_i) .If a prospective borrower has a debt-equity ratio of 0.4 and sales-asset ratio of 1.8, the expected probability of default is

• A)0.02.
• B)0.35.
• C)0.38.
• D)0.62.
• E)0.98.

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Definitions:

Journal Entry

A record in the accounting journal that represents a financial transaction and includes details such as date, amounts, accounts impacted.

Debit

A debit is an accounting entry that increases an asset or expense account or decreases a liability or equity account.

Total Retirement

The total amount of savings, investments, and other financial resources a person has accumulated for retirement.

FICA-OASDI

Federal Insurance Contributions Act - Old Age, Survivors, and Disability Insurance, a payroll tax that funds the Social Security and Medicare programs in the United States.