A Linear Probability Model You Have Developed Finds There Are

question 47

Multiple Choice

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 = .02 (equity multiplier) + .01 (total asset turnover)
A firm you are thinking of lending to has an equity multiplier of 3.2 times and a total asset turnover ratio of 1.95. Calculate the firm's expected probability of default, or bankruptcy.

• A) 7.06%
• B) 7.92%
• C) 8.35%
• D) 9.12%

---

Definitions:

Complex Adaptive Systems

Systems that are made up of multiple, interrelated components which adapt and evolve in response to changes in the environment.

Contingency Approach

A management theory that suggests the most appropriate form of decision making is contingent upon the internal and external situation.

Situational View

An approach that suggests the effectiveness of management techniques depends on the specific circumstances or situation at hand.

Closed-System Thinking

An approach that views organizations as systems that are relatively independent of environmental influences, focusing instead on internal dynamics and efficiency.