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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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This note was uploaded on 10/20/2008 for the course MGMT finance taught by Professor N/a during the Spring '08 term at Rensselaer Polytechnic Institute.
- Spring '08