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Consider the case of the Cast Iron Company. On each nondelinquent sale, Cast Iron receives revenues with a present value of $1,230 and incurs costs with a present value of $1,000. Cast Iron’s costs have increased from $1,000 to $1,080. Assuming that there is no possibility of repeat orders and that the probability of successful collection from the customer is p = 0.95, answer the following.
a-1. What is the expected profit of granting credit? (Do not round intermediate calculations.)
a-2. Should Cast Iron grant or refuse credit?
Grant
Refuse
b. What is the break-even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.)
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Calculate the straddle’s profit or loss if just prior to expiration SD’s stock price is $10 per share.
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