Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 109

Multiple Choice

Calculation of Bankruptcy Probability 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 = .15 (debt ratio) + .05 (profit margin)
A firm you are thinking of lending to has a debt ratio of 50 percent and a profit margin of 8 percent. Calculate the firm's expected probability of default, or bankruptcy.

• A) 7.90%
• B) 11.6%
• C) 30.00%
• D) 7.80%

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Definitions:

Factor Ratings

A method used to evaluate various factors in decision-making processes by assigning them scores based on their importance.

Fixed Costs

Costs that do not change with the level of output or production, remaining constant over a specific period.

Variable Costs

Costs that change in proportion to the level of goods or services produced.

Sales Volume

The quantity of products or services sold by a company during a certain period of time.