I have doubt regarding formula
Like why can’t we use all possible outcomes in denominator and in numerator the prob.of company’s Eps are below the consensus .
Can any one explain this question
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see, they have given the probability of dividends being cut if EPS exceeds or equals or falls below concensus and not the other way around. and we have to find out the probablity of eps falling below given dividend is cut. in order to do that first we need to find out joint prob. of dependant events as p(dividend cut and eps falls below) = p(div. cut) * p(eps below) = 0.85*0.2 = 0.17.
now, find out p(eps below/ div cut) = p(div cut and eps below) / p(div cut) = 0.17/0.2375 = 72%.