Suppose That Debt-Equity Ratio (D/E) and the Sales-Asset Ratio (S/A)

Multiple Choice

Suppose that debt-equity ratio (D/E) and the sales-asset ratio (S/A) were two factors influencing the past default behavior of borrowers.Based on past default (repayment) experience, the linear probability model is estimated as: PD_i = 0.5(D/E_i) + 0.1(S/A_i) .If a prospective borrower has a debt-equity ratio of 0.4 and sales-asset ratio of 1.8, the expected probability of default is

A) 0.02.
B) 0.35.
C) 0.38.
D) 0.62.
E) 0.98.