Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 61

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 = 0.20 (debt ratio) + 0.15 (profit margin)
A firm you are thinking of lending to has a debt ratio of 55 percent and a profit margin of 10 percent.Calculate the firm's expected probability of default,or bankruptcy.

• A)12.5 percent
• B)10.0 percent
• C)1.65 percent
• D)10.25 percent

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Definitions:

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