The Johnson Company forecasts an ending cash balance for the month of January of $2,700,000.The historical standard deviation for January's ending cash position is $1,000,000.Assuming ending cash balances are normally distributed,what would be an estimate of the probability of the company ruing out of cash in January?

Question

Quizplus · Accepted Answer

To calculate the probability of the company running out of cash in January, we need to find the standardized value of the ending cash balance using the formula: (ending cash balance - mean)/standard deviation.

Z = (0 - 2,700,000)/1,000,000 = -2.7

Using a standard normal distribution table, we can find the probability of Z being less than -2.7, which is approximately 0.0038 or <5%. Therefore, the answer is E.

The Johnson Company Forecasts an Ending Cash Balance for the Month