Calculating the Probability of Bankruptcy a Linear Probability Model You

question 15

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 profit margin.Based on past bankruptcy experience,the linear probability model is estimated as:
PD_i = 0.02 (debt/equity) + 0.80 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 110 percent and its expected probability of default,or bankruptcy,is estimated to be 8 percent.If sales are $2 million,calculate the firm's net income.

• A)$145,000
• B)$165,000
• C)$160,000
• D)$200,000

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Definitions:

Angina Pectoris

A condition characterized by chest pain due to reduced blood flow to the heart muscle.

Blood Supply

The provision of blood to a particular area or organ of the body, essential for delivering nutrients and oxygen.

Arteries

Blood vessels that carry oxygenated blood away from the heart to the body's organs and tissues.

Buildup

The gradual accumulation or increase of something over time.