Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 109

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 = .15 (debt ratio) + .05 (profit margin)
A firm you are thinking of lending to has a debt ratio of 50 percent and a profit margin of 8 percent. Calculate the firm's expected probability of default, or bankruptcy.

• A) 7.90%
• B) 11.6%
• C) 30.00%
• D) 7.80%

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Definitions:

Blood Pressure

Blood pressure is the force exerted by circulating blood on the walls of the body's arteries, a critical metric in diagnosing heart health.

Linear Relationships

A relationship between two variables where the change in one variable is directly proportional to the change in another.

Nonlinear Relationships

Nonlinear relationships describe scenarios in data where the change in outcome variable does not correspond to a constant change in predictor variable.

Scatterplot Form

A graphical representation of data using Cartesian coordinates to display values of two variables for a set of data.