A Linear Probability Model You Have Developed Finds There Are

question 39

Multiple Choice

A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as:
PDi = 0.02 (equity multiplier) + 0.06 (total asset turnover)
A firm has an equity multiplier of 1.1 times and a probability of default of 6.2 percent. Calculate the firm's total asset turnover ratio.

• A) 0.53 times
• B) 0.67 times
• C) 1.2 times
• D) 0.84 times

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