Suppose a Linear Probability Model You Have Developed Finds There

question 42

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 = 0.25 (debt ratio) + 0.12 (profit margin)
A firm you are thinking of lending to has a debt ratio of 62 percent and a profit margin of 14 percent. Calculate the firm's expected probability of default, or bankruptcy.

• A) 17.18 percent
• B) 2.604 percent
• C) 14.99 percent
• D) 19.09 percent

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Definitions:

Counterconditioning

A therapy technique used to replace an undesirable response to a stimulus with a desirable one.

Classical Conditioning

The method of learning through repeated association of two stimuli, wherein the first stimulus alone eventually triggers a response that was initially triggered by the second stimulus.

Operant Conditioning

An educational strategy where the strength of behaviors is manipulated through the assignment of incentives or the delivery of deterrents.

Extrinsic Rewards

External incentives given to employees or individuals, such as money, trophies, or recognition, to motivate behavior or performance.