Question: Based on past default (repayment) experience by Confidence Bank, their statisticians use a linear probability model to find common variables that may predict the probability

Based on past default (repayment) experience by Confidence Bank, their statisticians use a linear probability model to find common variables that may predict the probability of default by a borrower. They find that the debt-equity ratio (D/E), the sales-asset ratio (S/A), and the equity multiplier (E/A) were three factors influencing the past default behavior of borrowers. The model has the following parameter estimates. Risk Corporation has a (D/E) ratio of 0.325 , a profit margin (PM) of 1.8 and an EBIT/Sales of 2.25 . What does the model predict as the probability of default for Risky? PDi=X0.47(AD)j0.05(PM)j0.013(SalesEBIT)j

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

(a) Derive the expression for corrosion rate in MPY given in Equation (6). **Equation(6): MPY = 534W/DAT W: weight loss in milligrams ; D: density in grams per cubic centimeter; A : area in square...

Question 4 a . Suppose that there were a number of factors influencing the behaviour of borrowers. These include leverage or debtequity ratio ( D / E ) and the salesasset ratio ( S / A ) , loan...

Question 4a. Suppose that there were a number of factors influencing the behaviour of borrowers. These include leverage or debt-equity ratio (DE) and the sales-asset ratio (SA), loan monitoring...

3. The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) Spot 1 Year Spot 2 Year (1-year maturity) Forward 1-year ercent Treasur...

Automobiles, including cars and light trucks, are the most held nonfinancial assets among Americans, which are often financed through loans. Peter Firsov works in the car loan division of a major...

1. Confidence Bank has made a loan to Risky Corporation. The loan terms include a default risk-free base rate of 2 percent, a risk premium of 2.25 percent, an origination fee of 0.25 percent, and a 5...

A . Confidence Bank has made a loan to Risky Corporation. The loan terms include a default risk - free base rate of 2 percent, a risk premium of 2 . 2 5 percent, an origination fee of 0 . 2 5...

Konfidence Bank has made a loan to Risky Corporation. The loan terms include a default risk - free base rate of 2 percent, a risk premium of 2 . 2 5 percent, an origination fee of 0 . 2 5 percent,...

Chapter 7:7.2 #2 (p. 168) Chapter 8:8.2 #3 (p. 205) Chapter 9:9.2 #1 (p. 225) a., b., and c. (for c., only answer the adjustable rate mortgage part Chapter 7 from Personal Finance was adapted by The...

MARK X COMPANY (A) Mark X Company manufactures farm and specialty trailers of all types. More than 85 percent of the companys sales come from the western part of the United States, particularly...

Consider the two function machines to the right. Find all inputs for which the final output equals twice the input. f(x) = 6x Find all inputs for which the final output equals twice the input. (Use a...

What does it mean if a tax plan is reversible? Give some examples to illustrate this concept. What costs are associated with contractual provisions that make tax plans reversible?

1. Which of the following methods is used to add items to a list box? a. Add b. AddList c. Item d. ItemAdd

Draw a class diagram and its relationship based on the following statements. You can use any UML tool/software to represent your class diagram. Do NOT copy and paste your diagram, use the attachment...