Calculating the Probability of Bankruptcy a Linear Probability Model You

question 49

Multiple Choice

Calculating the Probability of Bankruptcy 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 = .03 (debt/equity) + .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:

Negative Reinforcement

A behavioral principle where the removal of an unpleasant stimulus following a specific behavior increases the likelihood of that behavior being repeated.

Employee Behavior

The actions and conduct of individuals within an organization, which can influence productivity, morale, and the work environment.

Pay Penalties

Financial sanctions imposed on individuals or organizations for not adhering to contracts, laws, or regulations.

Unethical Practices

Actions or behaviors that do not conform to the accepted standards of moral or ethical principles in the conduct of business or individual activity.