Calculation of Bankruptcy Probability 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 = .15 (debt ratio) + .05 (profit margin)
A firm you are thinking of lending to has a debt ratio of 50 percent and a profit margin of 8 percent. Calculate the firm's expected probability of default, or bankruptcy.

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Quizplus · Accepted Answer

PD_i = .15 (debt ratio) + .05 (profit margin)= .15 (50) + .05 (8)= 7.5 + 0.4= 7.90%

Calculation of Bankruptcy Probability Suppose a Linear Probability Model You