A Linear Probability Model You Have Developed Finds There Are

question 2

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 = 0.60 (debt/equity) + 0.02 (sales/total assets)
A firm you are thinking of lending to has a sales-to-assets ratio of 1.75 and its expected probability of default, or bankruptcy, is estimated to be 8.1 percent. Calculate the firm's debt-to-assets ratio.

• A) 7.667 percent
• B) 7.12 percent
• C) 92.88 percent
• D) 8.1 percent

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Definitions:

Maturity Value

The total amount payable to an investor at the end of a fixed-income security's life, including both the principal and interest.

Interest-bearing

Describes a financial instrument or account that generates interest income over time.

Notes Receivable

Claims against debtors documented through promissory notes that promise future payment of money.

Note Receivable

A written promise for the payment of a specified amount of money, with interest, by a set date or on demand to the holder of the note.