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15 January, 19:09

Assume that a firm, StableCo, faces a 0.4% chance of filing for bankruptcy per month. Over the course of 25 years, what is the probability that StableCo will file for bankruptcy?

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  1. 15 January, 21:00
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    The probability that StableCo will file for bankruptcy over the course of 25 years is 9.53%.

    Explanation:

    We have the probability of StableCo still operates normally in the business in one year is: 100%-0.4% = 99.60%.

    So, the cumulative probability of StableCo still operates normally in the business for 25 years: 99.6% ^25 = 90.47%.

    => The probability that StableCo will file for bankruptcy over the course of 25 years = 100% - the cumulative probability of StableCo still operates normally in the business for 25 years = 100% - 90.47% = 9.53%.

    So, the answer is 9.53%.
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