Buy-Low Distributors has a cash (and marketable securities) balance of $20 million. Free cash flows during a projected 1-year recession are expected to be $60 million with a standard deviation of $60 million. (Assume Buy-Low's free cash flows are approximately normally distributed.)
a. Determine the probability that Buy-Low will run out of cash during the recession.
b. Buy-Low is considering a change in its capital structure that would increase its annual fixed charges by $10 million. Determine the probability of running out of cash during the recession if the change in capital structure is undertaken.