A Linear Probability Model You Have Developed Finds There Are

A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as:
PD_i = 0.04 (equity multiplier) + 0.01 (total asset turnover)
A firm has an equity multiplier of 1.5 times and a probability of default of 7 percent. Calculate the firm's total asset turnover ratio.

A) 1.0
B) 4.5
C) 0.01
D) 2.0

Correct Answer:

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