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.

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The correct answer is A.The probability of default (PD) is given by the equation:PD = 0.04 (equity multiplier) + 0.01 (total asset turnover)We are given that the equity multiplier is 1.5 and the PD is 7%. Substituting these values into the equation, we get:0.07 = 0.04 (1.5) + 0.01 (total asset turnover)Solving for the total asset turnover, we get:total asset turnover = (0.07 - 0.06) / 0.01 = 1.0

A Linear Probability Model You Have Developed Finds There Are