### Credit Card Risk Assessment Analysis**Industry Statistics and Applicant Screening**From industry statistics, a credit card company knows that:- 0.8 (or 80%) of its potential cardholders are good credit risks.- 0.2 (or 20%) of its potential cardholders are bad credit risks.The company employs discriminant analysis to screen credit card applicants and determine which ones should receive credit cards. **Approval Rate and Results**- The company approves credit cards for 70% of those who apply.- Of those awarded credit cards, 95% turn out to be good credit risks.**Question for Analysis**What is the probability that an applicant who is a bad credit risk will be denied a credit card?### Explanation of the Concepts- **Good Credit Risks**: Applicants who are likely to repay their credit card balances responsibly.- **Bad Credit Risks**: Applicants who are less likely to repay their credit card balances.- **Discriminant Analysis**: A statistical method used to classify applicants into good or bad credit risk categories.- **Approval Rate**: The percentage of applicants who are granted credit cards.**Calculation Steps:**1. Determine the fraction of approved applicants who are bad credit risks.2. Calculate the probability of a bad credit risk being denied a credit card.By understanding how the company uses statistics and discriminant analysis to make decisions, we can deduce the probability that an applicant being a bad credit risk impacts their chances of receiving a credit card. This insight can help inform similar financial models and risk assessments in educational resources.

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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