Question

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?

Answer 1

Answer:

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%.