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Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 99

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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:
PDi = 0.25 (debt ratio) + 0.12 (profit margin)
A firm you are thinking of lending to has a debt ratio of 62 percent and a profit margin of 14 percent.Calculate the firm's expected probability of default,or bankruptcy.


Definitions:

Pain

A complex sensory and emotional experience associated with actual or potential tissue damage, or described in terms of such damage.

Negative Reinforcement

A behavioral principle where the removal of an unpleasant stimulus strengthens or increases the likelihood of a desired response.

Pill

A small, round, solid pharmaceutical oral dosage form of medication that can contain various active ingredients.

Pain

A distressing sensation and emotional experience linked to tissue damage or described in terms of such damage.

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