Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 54

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 = 0.18 (debt ratio) + 0.35 (profit margin)
You know a particular firm has a debt ratio of 35 percent and a probability of default of 8 percent.Calculate the firm's profit margin.

• A)4.857 percent
• B)8.163 percent
• C)6.53 percent
• D)8.00 percent

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