Financial institutions utilize prediction models to predict bankruptcy. One such model is the Altman Z- score model, which multiple corporate income and balance sheet values to measures the financial health of a company. If the model predicts a low Z- score value, the firm is in financial stress and is predicated to go bankrupt within the next two years. If the model predicts a moderate or high Z-score value, the firm is financially healthy and is predicated to be a nonbankrupt firm. The alternative hypothesis is that the firm is predicted to be a bankrupt firm.
a. Explain the risks associated with committing a Type I error in this case.
b. Explain the risks associate with committing a Type II error in this case.
c. Which type of error do you think executive want to avoid? Explain.
d. How would changes in the model affect the
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