A Linear Probability Model You Have Developed Finds There Are

question 2

Multiple Choice

A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the sales-to-total assets ratio. Based on past bankruptcy experience, the linear probability model is estimated as:
PD_i = 0.60 (debt/equity) + 0.02 (sales/total assets)
A firm you are thinking of lending to has a sales-to-assets ratio of 1.75 and its expected probability of default, or bankruptcy, is estimated to be 8.1 percent. Calculate the firm's debt-to-assets ratio.

• A) 7.667 percent
• B) 7.12 percent
• C) 92.88 percent
• D) 8.1 percent

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Definitions:

Equilibrium

A state in a market where supply equals demand, and there is no tendency for change in the price or quantity.

Price Floor

A government or regulatory-imposed price control that sets the minimum allowable price to be charged for a particular good or service. It is aimed at protecting producers by ensuring prices do not fall below a certain level.

Government

The governing body of a nation, state, or community, responsible for making and enforcing laws and policies.

Pencils

Writing instruments with a thin form factor, containing a core of graphite or a color pigment, used for writing or drawing.