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 = .2 (debt ratio) + .15 (profit margin) a firm you are thinking of lending to has a debt ratio of 55.1 percent and a profit margin of 10.25 percent. Calculate the firm's expected probability of default, or bankruptcy.

Multiple Choice

• 1.65%

• 12.56%

• 10.32%

• 10.25%