Progressive Leasing Interview Question
(The only numerical question requiring Excel/Calculator) Finally, gave me a probability based, expected default rate question. The exact question was that the company has to calculate the expected default rate given the minimum return they look for is 15% over lease value. The given lease value was $1000, and the scaling factor (lease cost) was 60% of lease value. Another cost, the cost of service that the company bears is $50, which is taken from customer while making the deal. Now, to simplify there were only 2 possible outcomes mentioned which is full payment over 12 months or default before the payments start.
Interview Answer
Anonymous
In my opinion, The answer was just a simple probability equation: 1150+50 = (1600+50)(1-x) + 50(x) Expected value for minimum return in this case was 1.15x1000 = 1150. The two cases on the other side of the equation are cases of default (with probability x) or full payment (with probability 1-x). The net of these 2 cases has to be equal to 1150. The cost of service, $50, is redundant as it is taken from the customer regardless if they default or now. The mistake I made was to switch 1-x with x so please be careful.