Calculation of Bankruptcy Probability a Linear Probability Model You Have

question 19

Multiple Choice

Calculation of Bankruptcy Probability A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio.Based on past bankruptcy experience,the linear probability model is estimated as:
PD_i = 0.04 (equity multiplier) + 0.01 (total asset turnover)
A firm has an equity multiplier of 1.5 times and a probability of default of 7 percent.Calculate the firm's total asset turnover ratio.

• A)1.0
• B)4.5
• C)0.01
• D)2.0

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