Calculating the Probability of Bankruptcy a Linear Probability Model You

question 48

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 sales-to-total assets ratio.Based on past bankruptcy experience,the linear probability model is estimated as:
PD_i = 0.60 (debt/equity) + 0.02 (sales/total assets)
A firm you are thinking of lending to has a sales-to-assets ratio of 1.75 and its expected probability of default,or bankruptcy,is estimated to be 8.1 percent.Calculate the firm's debt ratio.

• A)7.667 percent
• B)7.12 percent
• C)92.88 percent
• D)8.1 percent

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Definitions:

Cerebral Artery

A Cerebral Artery is a blood vessel that supplies blood to the brain, helping deliver oxygen and nutrients critical for its function.

Aortic

Relating to the aorta, the largest artery in the body, which carries oxygenated blood from the heart to the rest of the body.

Cusps

Pointed or rounded projections on the chewing surface of teeth, or flap-like structures in the heart valves.

AV Valve

Short for atrioventricular valve, it relates to the valves between the atria and ventricles of the heart that prevent backflow of blood.