A Linear Probability Model You Have Developed Finds There Are

question 119

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 sales-to-total assets ratio. Based on past bankruptcy experience, the linear probability model is estimated as:
PD_i = 0.45 (debt/equity) + 0.01 (sales/total assets)
A firm you are thinking of lending to has a sales-to-assets ratio of 1.9 and its expected probability of default, or bankruptcy, is estimated to be 7 percent. Calculate the firm's debt-to-assets ratio.

• A) 11.33 percent
• B) 10.18 percent
• C) 89.82 percent
• D) 7.00 percent

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Definitions:

Nova Scotia

A province in Canada, located on the country's Atlantic coast, known for its maritime heritage and natural beauty.

Quebec

A province in eastern Canada, known for its French heritage, language, and distinct cultural identity within the predominantly English-speaking country.

Anti-Catholicism

Hostility towards or opposition against the Catholic Church, its members, practices, or beliefs, often rooted in historical, religious, or cultural conflicts.

Thomas Jefferson

The third President of the United States (1801–1809), principal author of the Declaration of Independence (1776), and an influential Founding Father known for his promotion of the ideals of republicanism in the United States.