A Linear Probability Model You Have Developed Finds There Are

question 110

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 = 0.013 (debt/equity) + 0.78 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 112 percent and its expected probability of default, or bankruptcy, is estimated to be 15.35 percent. If sales are $1.55 million, calculate the firm's net income.

• A) $276,100
• B) $290,700
• C) $196,200
• D) $299,400

Interpret key financial ratios, including profit margin, fixed asset turnover, and total asset turnover.

Understand the impact of changes in accounts receivable, inventory, and fixed assets on cash flow and how this is reflected in the statement of cash flows.

Evaluate the use of industry benchmark information for financial analysis.

Recognize the significance of changes in financial ratios over time and their impact on company valuation.

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Definitions:

Language

A system of communication used by a particular community or country, consisting of written, verbal, or signed forms of communication.

Logical Thinking

The process of reasoning consistently and sensibly, using a structured and coherent approach to arrive at conclusions.

Reflex Behaviors

Automatic, involuntary, innate responses to stimulation.

Involuntary

Occurring without a person's conscious choice or control, often referring to reflex actions or physiological responses.