Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 63

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) + 0.50 (profit margin)
You know a particular firm has a debt ratio of 60 percent and a probability of default of 15 percent.Calculate the firm's profit margin.

• A)6.00 percent
• B)12.00 percent
• C)19.50 percent
• D)15.00 percent

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Definitions:

Residual Value

Residual value is the estimated value that an asset will have at the end of its useful life, crucial in leasing and depreciation calculations.

Reduce Uncertainty

Strategies or actions taken to minimize the unpredictability or variability in outcomes.

Leasing

A financial arrangement where a lessee pays the lessor for the use of an asset for a specified period of time, without owning the asset.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in equal annual amounts.