5. You have developed a set of criteria for evaluating distressed credits. Companies that do not...
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5. 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 test 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)? B. Using Bayes' formula, calculate the probability that a company is a survivor, given that it passes the test; that is, calculate P(survivor | pass test). C. What is the probability that a company is a nonsurvivor, given that it fails the test? D. Is the test effective? 5. 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 test 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)? B. Using Bayes' formula, calculate the probability that a company is a survivor, given that it passes the test; that is, calculate P(survivor | pass test). C. What is the probability that a company is a nonsurvivor, given that it fails the test? D. Is the test effective?
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