Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 69

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) + .50 (profit margin)
You know a particular firm has a debt ratio of 60 percent and a probability of default of 15 percent. Calculate the firm's profit margin.

• A) 6.00%
• B) 12.00%
• C) 19.50%
• D) 15.00%

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