Calculation of Bankruptcy Probability a Linear Probability Model You Have

question 83

Multiple Choice

Calculation of Bankruptcy Probability A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = .04 (equity multiplier) + .01 (total asset turnover)
A firm has an equity multiplier of 1.5 times and a probability of default of 7 percent. Calculate the firm's total asset turnover ratio.

• A) 1.0
• B) 4.5
• C) .01
• D) 2.0

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Definitions:

Nonprofit Organizations

Entities that operate for charitable, educational, or social purposes rather than for profit, reinvesting surplus revenues in their mission.

Organizational Units

Smaller, specialized sections within a larger organization, each with specific roles and responsibilities.

Cognitive Expectation

An individual's anticipation or belief about what may happen in the future, often based on past experiences or learning.

Tolman

Refers to Edward C. Tolman, a psychologist known for his contributions to cognitive learning theory, particularly the concept of latent learning.