What is the risk neutral probability of an upward movement in the project cash flows during the first year of operations?
When answering the questions below, refer to the following table and related data.
Project Cash Flow Tree From a New Project
Year 1 Year 2 Year 3
120.52 155.67 222.64
65.24 84.27 120.52
45.62 65.24
35.32
Effective annual risk free rate = 4.5%
Expected market return = 10%
Cash flow beta = 1.4
The true probability of the high cash flow in a given period is 52.0%.
A)
35.6%
B)
40.3%
C)
48.1%
D)
59.7%
Answer:
B
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