Logit models can be used to determine the probability of default of a company as a...

 

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Logit models can be used to determine the probability of default of a company as a function of financial ratios. Default is a binary variable: Y = 1 if the firm defaults, Y=0 if it does not default. The following binary regression was estimated: L = -2.318 + 1.420 * RE/TA + 7.179 * EBIT/TA - 1.616 * ME/TL s.e. (0.236) (0.229) (2.725) (0.325) L = estimated logit, RE/TA= Retained earnings/total assets, EBIT/TA= EBIT/total assets, ME/TL= Market value equity/ book value of long-term debt. What is the probability of default of a company with the following financial ratios: RE/TA=0.46 EBIT/TA=0.22 and ME/TL=0.03? Logit models can be used to determine the probability of default of a company as a function of financial ratios. Default is a binary variable: Y = 1 if the firm defaults, Y=0 if it does not default. The following binary regression was estimated: L = -2.318 + 1.420 * RE/TA + 7.179 * EBIT/TA - 1.616 * ME/TL s.e. (0.236) (0.229) (2.725) (0.325) L = estimated logit, RE/TA= Retained earnings/total assets, EBIT/TA= EBIT/total assets, ME/TL= Market value equity/ book value of long-term debt. What is the probability of default of a company with the following financial ratios: RE/TA=0.46 EBIT/TA=0.22 and ME/TL=0.03?

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The equation you provided from the image is a logit model which is a type of regression model used f... View the full answer