A Linear Probability Model You Have Developed Finds There Are

question 19

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 profit margin. Based on past bankruptcy experience, the linear probability model is estimated as: PDi = .01 (debt/equity) + .76 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 121 percent and its expected probability of default, or bankruptcy, is estimated to be 8.125 percent. If sales are $1 million, calculate the firm's net income.

• A) $81,600
• B) $87,700
• C) $91,000
• D) $97,400

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Definitions:

Mutually Advantageous Trade

Trade that benefits all parties involved, allowing each to gain something of value by exchanging goods or services.

Production Possibilities Curves

A graphical representation that shows the maximum number of possible units a company can produce of two products within a set of inputs.

Specialize

Concentrating on and becoming expert in a particular subject or skill.