Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 77

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 = .20 (debt ratio) + .15 (profit margin)
A firm you are thinking of lending to has a debt ratio of 55 percent and a profit margin of 10 percent. Calculate the firm's expected probability of default, or bankruptcy.

• A) 12.5%
• B) 10.0%
• C) 1.65%
• D) 10.25%

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Definitions:

Dendrites

The branching projections of a neuron that act to conduct the electrochemical stimulation received from other neural cells to the cell body, or soma, of the neuron from which the dendrites project.

Reserve Capacity

The extra amount of functional capability that an organism or system can draw upon when needed.

Homeostasis

The biological process by which living organisms maintain a stable internal environment despite changes in the external environment.

Senescence

The biological process of aging, characterized by the gradual decline in physiological functions and increased vulnerability to diseases.