QUESTION1 CONTINUED The Pseudo-R for this model is 28% and the likelihood Ratio (LR) test is 106, which is significant at the 1% level A Likelihood Ratio (LR) test is calculated to compare the log-likelihood of the two models. The LR value is calculated as 15.5 with a p-value of 0.0%. a. Explain the overall fit of the model and how well it predicts default. (30% question weight) b. Describe the impact of each factor of probability of default. (20% question weight) C. Calculate the t-ratio for each factor in Model A. (2096 question weight) d. Discuss which model you would chose to calculate the probability of default of corporate firms and give a rationale for including OR excluding the RE/TA and ME/TL from the model. (30% question weight) The following logit model has been produced to calculate the probability of default of corporate firms. Model A: Constant WC/TA EBIT/TA ME/TL RE/TA -1.26 Coefficient -5.14 1.41 -9.46 -0.66 S/TA 2.80 0.72 0.32 1.42 0.38 3.68 0.34 Standard error of the coefficient p-value 0.00 0.32 0.00 0.01 0.05 0.00 Where: WC/TA is Working capital/Total assets RE/TA is Retained earnings/Total assets EBIT/TA is Earnings before interest and taxes/Total assets ME/TL is market value of equity/Total liabilities S/TA is Sales/Total assets The Pseudo-R for this model is 33% and the likelihood Ratio (LR) test is 122, which is significant at the 1% level. The insignificant factors RE/TA and ME/TL are removed from Model A and the following logit model is produced Model B: EBIT/TA S/TA Constant WC/TA -4.69 L -1.26 0.26 0.36 Coefficient ant Standard error of the coefficient -4.73 -0.32 0.25 4.93 p-value 0.00 0.00 0.34 0.20 QUESTION1 CONTINUED The Pseudo-R for this model is 28% and the likelihood Ratio (LR) test is 106, which is significant at the 1% level A Likelihood Ratio (LR) test is calculated to compare the log-likelihood of the two models. The LR value is calculated as 15.5 with a p-value of 0.0%. a. Explain the overall fit of the model and how well it predicts default. (30% question weight) b. Describe the impact of each factor of probability of default. (20% question weight) C. Calculate the t-ratio for each factor in Model A. (2096 question weight) d. Discuss which model you would chose to calculate the probability of default of corporate firms and give a rationale for including OR excluding the RE/TA and ME/TL from the model. (30% question weight) The following logit model has been produced to calculate the probability of default of corporate firms. Model A: Constant WC/TA EBIT/TA ME/TL RE/TA -1.26 Coefficient -5.14 1.41 -9.46 -0.66 S/TA 2.80 0.72 0.32 1.42 0.38 3.68 0.34 Standard error of the coefficient p-value 0.00 0.32 0.00 0.01 0.05 0.00 Where: WC/TA is Working capital/Total assets RE/TA is Retained earnings/Total assets EBIT/TA is Earnings before interest and taxes/Total assets ME/TL is market value of equity/Total liabilities S/TA is Sales/Total assets The Pseudo-R for this model is 33% and the likelihood Ratio (LR) test is 122, which is significant at the 1% level. The insignificant factors RE/TA and ME/TL are removed from Model A and the following logit model is produced Model B: EBIT/TA S/TA Constant WC/TA -4.69 L -1.26 0.26 0.36 Coefficient ant Standard error of the coefficient -4.73 -0.32 0.25 4.93 p-value 0.00 0.00 0.34 0.20