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) + 0.50 (profit margin)
You know a particular firm has a debt ratio of 60 percent and a probability of default of 15 percent. Calculate the firm's profit margin.

A) 6.00 percent
B) 12.00 percent
C) 19.50 percent
D) 15.00 percent

Correct Answer:

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