Suppose a Linear Probability Model You Have Developed Finds There

Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
PD_i = 0.20 (debt ratio) + 0.15 (profit margin)
A firm you are thinking of lending to has a debt ratio of 55 percent and a profit margin of 10 percent. Calculate the firm's expected probability of default, or bankruptcy.

A) 12.5 percent
B) 10.0 percent
C) 1.65 percent
D) 10.25 percent

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free