An Analyst Expects That 10% of All Publicly Traded Companies

question 109

Multiple Choice

An analyst expects that 10% of all publicly traded companies will experience a decline in earnings next year. The analyst has developed a ratio to help forecast this decline. If the company is headed for a decline, there is a 70% chance that this ratio will be negative. If the company is not headed for a decline, there is only a 20% chance that the ratio will be negative. The analyst randomly selects a company and its ratio is negative. Based on Bayes' theorem, the posterior probability that the company will experience a decline is ________.

• A) 3%.
• B) 7%.
• C) 18%.
• D) 28%.

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Definitions:

Consolidated Balance Sheet

A financial statement that shows the aggregate financial position of a parent company and its subsidiaries as if they were a single entity.

Common Shares

A type of security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits via dividends.

Consolidated Statement

Financial statements that aggregate the assets, liabilities, and operations of a parent company and its subsidiaries.

Equity Earnings

The portion of an investee's profits or losses that is attributed to the investor based on their ownership percentage.