Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 40

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 = .25 (debt ratio) + .12 (profit margin)
A firm you are thinking of lending to has a debt ratio of 62 percent and a profit margin of 14 percent. Calculate the firm's expected probability of default, or bankruptcy.

• A) 17.18%
• B) 2.604%
• C) 14.99%
• D) 19.09%

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Definitions:

Dependency

A situation where one task or activity cannot start or finish until another has been completed.

Lead Time

The time interval between the initiation and completion of a process, such as the period from ordering to receiving goods.

Free Float

In project management, the amount of time that a project task can be delayed without causing a delay to subsequent tasks or the project's overall deadline.

Current Schedule

The latest version of the project schedule, reflecting all known updates, changes, and progress.