A Linear Probability Model You Have Developed Finds There Are

question 82

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 = 0.03 (debt/equity) + 0.65 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 105 percent and its expected probability of default, or bankruptcy, is estimated to be 7 percent. If sales are $3 million, calculate the firm's net income.

• A) $177,692
• B) $210,000
• C) $193,846
• D) $300,000

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Definitions:

Mackintosh's Attentional Theory

A theory proposing that the allocation of attention during learning is influenced by the predictability of stimuli, affecting conditioning strength.

Conditioned Response Strength

The intensity or magnitude of a response that has been learned under conditional circumstances.

Conditioning

A process of behavior modification in which a subject learns to respond in a desired manner to a previously neutral stimulus that has been repeatedly presented along with an unconditioned stimulus.

Unconditioned Response Sequences

The natural, automatic reactions that occur in response to an unconditioned stimulus without prior learning or conditioning.