Calculation of Bankruptcy Probability a Linear Probability Model You Have

question 112

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 = 0.05 (equity multiplier) + 0.02 (total asset turnover)
A firm has an equity multiplier of 1.9 times and a probability of default of 10 percent.Calculate the firm's total asset turnover ratio.

• A)0.25
• B)25
• C)2.5
• D)0.75

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