Required
a. Based on her prior probabilities, which action should Marie take? Show your calculations.
b. Before making a final decision, Marie decides she needs more information. She obtains
Risky Mining's current financial statements and examines its debt-equity ratio. This
ratio can be either "HI" or "LO." Upon calculating the ratio, Marie observes that it
is LO. On the basis of her prior experience in bond investments, Marie knows the
following conditional probabilities:
Future State
Debt-to-Equity Ratio
LO
HI
NB (Not Bankrupt)
B (Bankrupt)
0.50
0.05
0.50
0.95
Which action should Marie now take? Show your calculations, taken to two decimal
places.
c. A new accounting standard requires that Risky Mining Ltd.'s pension liabilities must
now be measured in the financial statements at their expected discounted present val-
ues (i.e., value in use), instead of the previous pay-as-you-go accounting under which
pension expense was based on amounts paid out for pensions during the period with
no balance sheet liability recorded.
Evaluate (in words only) the likely impact of the new standard on the main diagonal
probabilities of the information system in part b.