Use the following data: ROA = 10%; Total liabilities = 90% of assets; EBITDA = 10% of liabilities. Calculate the relative chance of failure using the following model: Log (relative chance of failure)= -6.445 - 1.192 ROA + 2.307 (liabilities/assets)- 0.346(EBITDA/liabilities).

Question

Quizplus · Accepted Answer

We can plug in the given values for ROA, liabilities/assets, and EBITDA/liabilities into the model to find the log (relative chance of failure):
Log (relative chance of failure) = -6.445 - 1.192(0.10) + 2.307(0.90) - 0.346(0.10/0.90)
Log (relative chance of failure) = -3.233
To find the relative chance of failure, we can take the antilog of -3.233:
Relative chance of failure = 0.0194
Finally, to convert to a percentage, we can multiply by 100:
Relative chance of failure = 1.94%
Therefore, the relative chance of failure is 1.09 percent (rounded to two decimal places), which corresponds to answer choice B.

Use the Following Data: ROA = 10%; Total Liabilities =