A Linear Probability Model You Have Developed Finds There Are

question 72

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 profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
PD_i = 0.01 (debt/equity) + 0.76 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 121 percent and its expected probability of default, or bankruptcy, is estimated to be 8.125 percent. If sales are $1 million, calculate the firm's net income.

• A) $81,600
• B) $87,700
• C) $91,000
• D) $97,400

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Definitions:

Fixed Costs

Costs that remain constant regardless of how much is produced or sold, including expenses like rent, salaries, and insurance.

Relevant Range

The span of activity or volume where the specific assumptions of cost behavior are considered valid.

Break-even Point

The level of production or sales at which total revenues equal total costs, resulting in neither profit nor loss.

Second Marriage

A second marriage refers to the act of getting married again after a previous marriage has ended, either through divorce or the death of a spouse.