Suppose a Linear Probability Model You Have Developed Finds There

question 20

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 = 0.28 (debt ratio) + 0.51 (profit margin)
You know a particular firm has a debt ratio of 46 percent and a probability of default of 18 percent. Calculate the firm's profit margin.

• A) 11.93 percent
• B) 13.27 percent
• C) 10.04 percent
• D) 12.81 percent