A Linear Probability Model You Have Developed Finds There Are

question 30

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 = 0.52 (debt/equity) + 0.01 (sales/total assets)
A firm you are thinking of lending to has a sales-to-assets ratio of 2.0 and its expected probability of default, or bankruptcy, is estimated to be 12 percent. Calculate the firm's debt ratio.

• A) 14.03 percent
• B) 14.92 percent
• C) 15.49 percent
• D) 15.97 percent

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Definitions:

Marginal Cost

The cost of producing one additional unit of a good or service, representing the increase in total cost from an increase in production by one unit.

Hats

Headwear pieces, varying in style and function, often used for fashion, protection, or ceremonial purposes.

Price Effect

The impact on consumer demand and market supply when the price of a good or service changes.

Total Revenue

The total amount of money generated by a firm from the sale of its goods or services.