Suppose a Linear Probability Model You Have Developed Finds There

question 93

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 = 0.20 (debt ratio) + 0.50 (profit margin)
You know a particular firm has a debt ratio of 60 percent and a probability of default of 15 percent. Calculate the firm's profit margin.

• A) 6.00 percent
• B) 12.00 percent
• C) 19.50 percent
• D) 15.00 percent

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Definitions:

Product Cost

Costs that are incurred to acquire or manufacture a product, including direct materials, direct labor, and manufacturing overhead.

Direct Materials

Direct Materials are raw materials that are consumed in the manufacturing process, directly traceable to the finished product.

Goods Sold

This term refers to the merchandise that has been purchased by consumers, indicating sales transactions that have been completed during a certain period.

Product Cost

The total expense incurred in manufacturing a product, including direct labor, direct materials, and overhead costs.