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 sales-to-total assets ratio. Based on past bankruptcy experience, the linear probability model is estimated as:
PD_i = 0.65 (debt/equity) + 0.10 (sales/total assets)
A firm you are thinking of lending to has a sales-to-assets ratio of 0.9 and its expected probability of default, or bankruptcy, is estimated to be 11 percent. Calculate the firm's debt ratio.

A) 1.03 percent
B) 2.99 percent
C) 3.08 percent
D) 9.70 percent

Correct Answer:

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