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Unformatted text preview: c. A paying customer now represents a perpetuity of profits equal to: $100 – $96 = $4 per month The present value is: $4/0.01 = $400 So the present value of a sale, given a 7% default rate, is: (0.93 × $400) – (0.07 × $96) = $365.28 It clearly pays to extend credit. d.(p × $400) – [(1 – p) × $96] = 0 ⇒ p = 0.194 = 19.4% So the probability of payment must be greater than 19.4% to justify extending credit....
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 Spring '08
 n/a
 Equals sign, Mathematical finance

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