Module 4 part 1 Short Answer/Calculation (2 Marks)

As a credit officer for a small bank, you have developed a linear probability model to analyse past default patterns in the small business loan portfolio. You have determined the following relationship:

Repeating the above equation in case it does not format properly:

1-PD=0.15*ROE+ 0.3*ROA+ 0.25*Net Prof Marg+ 0.15* Asset Util+ 0.2* Current Ratio

Small Business 1 and Small Business 2 have the following ratios:

Ratio	Business 1	Business 2
ROE	0.28	0.31
ROA	0.22	0.26
Net Profit Margin	0.21	0.22
Asset Utilisation	1.5	1.7
Current Ratio	2.0	1.9
1-PD

a) Populate the table by calculating 1-PD for each business (1 Mark) (Copy and Paste the table into the answer panel)

b) Which small business would you prefer to extend loan funds to? Why? (1 Mark)