Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 101

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 = .23 (debt ratio) + .08 (profit margin)
A firm you are thinking of lending to has a debt ratio of 60 percent and a profit margin of 12 percent. Calculate the firm's expected probability of default, or bankruptcy.

• A) 14.76%
• B) 22.32%
• C) 10.30%
• D) 13.25%

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