(Continuation of Problem XXXXXXXXXXNow divide the companies into three groups: group I consists of those companies with a P/E of 7 or less, group II consists of those companies with a P/E of 8 to 10,...

(Continuation of Problem 11.2.) Now divide the companies into three groups: group I consists of those companies with a P/E of 7 or less, group II consists of those companies with a P/E of 8 to 10, and group III consists of those companies with a P/E greater than or equal to 11. Perform a stepwise discriminant function analysis, using these three groups and the same variables as in Problem 11.2. Comment

PROBLEM 11.2

For the data shown in Table 9.1, divide the chemical companies into two groups: group I consists of those companies with a P/E less than 9, and group II consists of those companies with a P/E greater than or equal to 9. Group I should be considered mature or troubled firms, and group II should be considered growth firms. Perform a discriminant function analysis, using ROR5, D/E, SALESGR5, EPS5, NPM1, and PAYOUTR1. Assume equal prior probabilities and costs of misclassification. Test the hypothesis that the population D 2 = 0. Produce a graph of the posterior probability of belonging to group I versus the value of the discriminant function. Estimate the probabilities of misclassification by several methods