Calculation of Bankruptcy Probability a Linear Probability Model You Have

question 108

Multiple Choice

Calculation of Bankruptcy Probability A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = .05 (equity multiplier) + .02 (total asset turnover)
A firm has an equity multiplier of 1.9 times and a probability of default of 10 percent. Calculate the firm's total asset turnover ratio.

• A) 0.25
• B) 25
• C) 2.5
• D) 0.75

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Definitions:

Visual Imagery

The mental visualization of scenes, objects, or events without their physical presence.

Mnemonics

Strategies to facilitate retention and later retrieval of information.

Long-term Memory

The aspect of our memory system that is responsible for the storage of information over long periods of time, potentially lasting from minutes to a lifetime.

Bahrick

Refers to Harry P. Bahrick, a psychologist known for his research on memory, including long-term memory and retention.