Question: = Suppose the estimated linear probability model is PD .3 X1 + .2 X2 0.5 X3 + error, where X1 0.75 is

= Suppose the estimated linear probability model is PD .3 X1 + .2 X2 − 0.5 X3 + error, where X1 0.75 is the borrower’s debt/equity ratio, X2 0.25 is the volatility of borrower earnings, and X3 0.10 is the borrower’s profit ratio. What is the projected probability of default for the borrower? What is the projected probability of repayment if the debt–equity ratio is 2.5? What is a major weakness of the linear probability model?

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