Assume That There Are Two Factors Influencing the Past Default

question 74

Multiple Choice

Assume that there are two factors influencing the past default behaviour of borrowers, these being the debt to equity ratio and the sales to assets ratio.Based on past default (repayment) experience, the linear probability model is estimated as Z_i = 0.3(D/E_i) + 0.15 (S/A_i) .Assume that a prospective borrower has a D/E ratio of 0.9 and a sales to assets ratio of 2.5.What is the borrower's probability of default?

• A)0.885
• B)0.645
• C)0.45
• D)3.4

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