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 = .28 (debt ratio) + .51 (profit margin)
You know a particular firm has a debt ratio of 46 percent and a probability of default of 18 percent. Calculate the firm's profit margin.

A) 11.93%
B) 13.27%
C) 10.04%
D) 12.81%

Correct Answer:

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