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 debt-to-equity ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
PD_i = 0.01 (debt/equity) + 0.76 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 121 percent and its expected probability of default, or bankruptcy, is estimated to be 8.125 percent. If sales are $1 million, calculate the firm's net income.

A) $81,600
B) $87,700
C) $91,000
D) $97,400

Correct Answer:

Verified

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

Access For Free