Question

Please answer only C and D questions according to the problem:

You have developed a set of criteria for evaluating distressed credits. Companies that do not receive a passing score are classed as likely to go bankrupt within 12 months. You gathered the following information when validating the criteria: • Forty percent of the companies to which the test is administered will go bankrupt within 12 months: P(nonsurvivor) =0.40. • Fifty-five percent of the companies to which the rest is administered pass it: P(pass test) = 0.55. • The probability that a company will pass the test given that it will subsequently survive 12 months, is 0.85: P(pass test | survivor) = 0.85

A. What is P(pass test | nonsurvivor )? Answer:

B. Using Bayes’ formula, calculate the probability that accompany is a survivor, given that it passes the test; that is calculate P (survivor | pass test). Answer:

C. What is the probability that a company is a nonsurvivor, given that it fails the test? Answer:

D. Is the test effective? Answer:

Answer 1