Researchers have developed models based on financial ratios…
Researchers have developed models based on financial ratios that predict whether a company will go bankrupt over the next 12 months. In a test of the model, the model correctly predicted bankruptcy of firms that did fail 85% of the time. If also correctly predicted non-bankruptcy for 75% of firms that didn’t fail. Suppose we assume 8% of all firms will go bankrupt this year. What is the probability the model predicts bankruptcy for a given firm? Hint: Draw a tree. Report your answer to 3 decimal places