Suppose a Linear Probability Model You Have Developed Finds There

question 98

Multiple Choice

Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
PD_i = 0.23 (debt ratio) + 0.08 (profit margin)
A firm you are thinking of lending to has a debt ratio of 60 percent and a profit margin of 12 percent. Calculate the firm's expected probability of default, or bankruptcy.

• A) 14.76 percent
• B) 22.32 percent
• C) 10.30 percent
• D) 13.25 percent

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Definitions:

Trait of Disidentification

A psychological process where individuals detach their self-esteem from outcomes in a specific domain to protect their overall self-worth.

Ethnocentrism

The belief in the inherent superiority of one's own ethnic group or culture, often accompanied by a disdain for other groups.

Stereotype Threat

The risk of confirming negative stereotypes about one's social group, which can impair performance in a relevant area.

Social Dominance Orientation

A personality trait which predicts social and political attitudes, emphasizing hierarchy in the relationships among groups.