Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 68

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 = 0.15 (debt ratio) + 0.05 (profit margin)
A firm you are thinking of lending to has a debt ratio of 50 percent and a profit margin of 8 percent.Calculate the firm's expected probability of default,or bankruptcy.

• A)7.90 percent
• B)11.6 percent
• C)30.00 percent
• D)7.80 percent

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Definitions:

Highest Amount

The maximum quantity or degree of something that is recorded, attained, or allowed.

Consumer

An individual who purchases goods or services for personal use.

Market Equilibrium

Market equilibrium occurs when the quantity demanded of a good matches the quantity supplied, leading to a stable market price where there is no tendency for it to change.

Price Drop

A decrease in the cost of goods or services in the market, often due to supply and demand factors, competition, or other economic elements.