Revenue Increase Calculation

Question

Can someone please explain how this works

5%/3 + 5% = 6.67% ? And why this particular equation?

Answer 1

Hi Mayank,

Thank you very much for this question. I would be happy to share the solution to it:

First of all, the calculation is correct: (5% ÷ 3) + 5% ≈ 1.67% + 5% ≈ 6.67%.
The reason why you need to run the calculation this way is simple: In section “Background”, it is stated “The average lifetime of these four products is three years.” Since RetailBankingCo has to pay the closing commission only once, the revenue impact of this commission needs to be divided by 3, while the trailing commission of 5% needs to be paid on a yearly basis.

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Best,

Hagen

Answer 2

Hi Mayank,

Thanks for the question! Hagan answered it well, but, just remember to carefull read the case explanations. It's great to ask (and you should feel free to), but, figuring it out on your own makes the learning stick all that much more :)

Answer 3

Hi Mayank,

Well, basically:

You divide 5 percent in 3. That should mean 1 percent and another 0.66 percent.

Then you put this on top of the 5 percent and you have 6.67 percent.

Does this make sense? What's making you confused exactly?

Best,
Cristian