Characteristics of the probability distributions

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NDA Corp is trying to calculate the probability that it will not have sufficient cash flows from operations to pay the interest on its debt, which equals $20 million one year from now. It is reasonable to model its annual operating cash flows as being equal to its sales revenue minus its operating costs. Let CF = operating cash flows, R = revenue, and C= operating costs for the coming year. Then, CF = R - C.

It has estimated the following characteristics of the probability distributions for R and C.

Variable Prob Distribution Expected value Standard deviation

R Normal $350 million $10 million

C Normal $300 million $15 million

The correlation coefficient between R and C equals 0.3.

Is the probability of not having sufficient cash flows to pay interest on debt greater than or less than 0.01? Show your work and logic.

Reference no: EM132505602

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