Suppose a Linear Probability Model You Have Developed Finds There

question 109

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 = 0.15 (debt ratio) + 0.05 (profit margin)
A firm you are thinking of lending to has a debt ratio of 50 percent and a profit margin of 8 percent. Calculate the firm's expected probability of default, or bankruptcy.

• A) 7.90 percent
• B) 11.6 percent
• C) 30.00 percent
• D) 7.80 percent

Understand the principles and conditions related to impairment of financial assets.

Learn the accounting treatments for derivative financial instruments and their role in financial risk management.

Comprehend the subsequent measurement principles, including amortised cost and fair value, and their impact on financial reporting.

Understand the process and implications of offsetting accounts receivable and payable between companies.

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Definitions:

Annual Return

The percentage change in an investment's value over a one-year period, including dividends and interest.

Future Value

The value of an investment at a specified date in the future, taking into account factors like compound interest or returns.

Ordinary Annuity

A sequence of identical disbursements occurring at successive intervals for a set duration.

Accumulated Value

The total sum of all investments, earnings, and reinvestments over a period, often referring to the value of a life insurance policy.