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3. Suppose we develop model to calculate probability of default such as follows Z= 0.2 + 1.4X1 + 0.6X2 = Z X1 X2 Probability of
3. Suppose we develop model to calculate probability of default such as follows Z= 0.2 + 1.4X1 + 0.6X2 = Z X1 X2 Probability of non-default Ratio of working capital / total assets Ratio of earning before interest and taxes / Total assets Suppose we observe financial numbers for company X and Y as follows: X Y Total Assets Rp50 billion Rp100 billion Working Capital Rp5 billion Rp50 billion EBIT -Rp30 billion Rp40 billion a. If we use linear probability model, calculate probability of non default for X and Y b. Evaluate the numbers, does it make sense. In what way logit model improve the linear probability model? c. Calculate probability of non-default using logit model for company X and Y. 3. Suppose we develop model to calculate probability of default such as follows Z= 0.2 + 1.4X1 + 0.6X2 = Z X1 X2 Probability of non-default Ratio of working capital / total assets Ratio of earning before interest and taxes / Total assets Suppose we observe financial numbers for company X and Y as follows: X Y Total Assets Rp50 billion Rp100 billion Working Capital Rp5 billion Rp50 billion EBIT -Rp30 billion Rp40 billion a. If we use linear probability model, calculate probability of non default for X and Y b. Evaluate the numbers, does it make sense. In what way logit model improve the linear probability model? c. Calculate probability of non-default using logit model for company X and Y
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