A Linear Probability Model You Have Developed Finds There Are

question 48

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 = .013 (debt/equity) + .78 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 112 percent and its expected probability of default, or bankruptcy, is estimated to be 15.35 percent. If sales are $1.55 million, calculate the firm's net income.

• A) $276,100
• B) $290,700
• C) $196,200
• D) $299,400

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Definitions:

Cognitive Consonance

An error in key-term, possibly meant "Cognitive Dissonance." NO.

Creativity

The ability to produce original, innovative ideas, solutions, or products through imaginative thinking and problem-solving.

Intuition

The ability to understand or know something immediately, based on feelings rather than facts or evidence.

Logical Reasoning

The process of using a structured, methodical approach to arrive at conclusions or solve problems based on given premises or facts.