Calculating the Probability of Bankruptcy a Linear Probability Model You

question 75

Multiple Choice

Calculating the Probability of Bankruptcy A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the sales-to-total assets ratio.Based on past bankruptcy experience,the linear probability model is estimated as:
PD_i = 0.45 (debt/equity) + 0.01 (sales/total assets)
A firm you are thinking of lending to has a sales-to-assets ratio of 1.9 and its expected probability of default,or bankruptcy,is estimated to be 7 percent.Calculate the firm's debt ratio.

• A)11.33 percent
• B)10.18 percent
• C)89.82 percent
• D)7.00 percent

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Customers

Individuals or organizations that purchase goods or services from a business or seller.

Top Managers

The highest echelon of leaders within an organization, responsible for strategic decision-making and overall direction of the company.

Executive Team

A group of high-ranking officers within a company, responsible for strategic decision-making and management.

Controlling

The management function focused on monitoring performance, comparing it with goals, and taking corrective action as needed.