Calculating the Probability of Bankruptcy a Linear Probability Model You

question 49

Multiple Choice

Calculating the Probability of Bankruptcy A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = .03 (debt/equity) + .65 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 105 percent and its expected probability of default, or bankruptcy, is estimated to be 7 percent. If sales are $3 million, calculate the firm's net income.

• A) $177,692
• B) $210,000
• C) $193,846
• D) $300,000

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Definitions:

Cycle Time

The total time from the beginning to the end of a process, including processing time and any delays, often used in manufacturing and project management.

Conversion Rate

The percentage of users who take a desired action, often used in marketing to indicate the effectiveness of an advertising campaign or website design.

Conversion Costs

Costs incurred during the conversion of raw materials into finished goods, primarily comprising direct labor costs and manufacturing overhead.

Conversion Costs

The combined costs of direct labor and manufacturing overhead involved in transforming raw materials into finished goods.