Calculating the Probability of Bankruptcy a Linear Probability Model You

question 48

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 = 0.60 (debt/equity) + 0.02 (sales/total assets)
A firm you are thinking of lending to has a sales-to-assets ratio of 1.75 and its expected probability of default,or bankruptcy,is estimated to be 8.1 percent.Calculate the firm's debt ratio.

• A)7.667 percent
• B)7.12 percent
• C)92.88 percent
• D)8.1 percent

Examine how changing environmental conditions, including climate change, affect biodiversity and ecosystems.

Understand the process of adaptive radiation and its role in the diversification of life.

Analyze the patterns of fossil records, including rates of origination and extinction.

Gain insight into the impact of atmospheric and oceanic changes on marine life.

---

Definitions:

Accounts Receivable

Accounts receivable represents money owed to a company by its customers for goods or services delivered on credit.

Inventory Turnover

A measure of the number of times inventory is turned into goods sold during the year, computed by dividing the cost of goods sold by the average inventory.

Inventory Management

The practice of overseeing and controlling the ordering, storage, and use of components that a company uses in the production of the items it sells, as well as the management of finished products available for sale.

Average Total Assets

A financial metric calculated by averaging a company's total assets at the beginning and end of an accounting period, used to evaluate assets' efficiency.