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 = .18 (debt ratio) + .35 (profit margin)
You know a particular firm has a debt ratio of 35 percent and a probability of default of 8 percent. Calculate the firm's profit margin.

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The correct answer is A.PD_i = .18 (debt ratio) + .35 (profit margin)0.08 = 0.18 (0.35) + 0.35 (profit margin)0.08 = 0.063 + 0.35 (profit margin)0.017 = 0.35 (profit margin)profit margin = 0.017 / 0.35 = 0.04857 = 4.857%

Calculation of Bankruptcy Probability Suppose a Linear Probability Model You