Suppose the estimated linear probability model is PD 0 3X 1 0 2X 2 05X 3 error, where X 1 0 75 is the borrower's debt equity ratio X 2 0 25 is the volatility of borrower earnings and X 3 0 10 is the borrowers profit ratio a What is the projected probability of default for the borrower b What is the projected probability of repayment if the debt equity ratio is 2 5

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Question: Suppose the estimated linear probability model is PD = 0.3X 1 + 0.2X 2 - .05X 3 + error, where X 1 = 0.75 is

Suppose the estimated linear probability model is PD = 0.3X₁ + 0.2X₂ - .05X₃ + 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 borrowers profit ratio.

a. What is the projected probability of default for the borrower?

b. What is the projected probability of repayment if the debt/equity ratio is 2.5?

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