When Answering the Questions Below, Refer to the Following Table

question 12

Multiple Choice

When answering the questions below, refer to the following table and related data.
Project Cash Flow Tree From a New Project
$$\begin{array} { r r r } \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\120.52 & 155.67 & 222.64 \\65.24 & \mathbf { 8 4 . 2 7 } & 120.52 \\& 45.62 & \mathbf { 6 5 . 2 4 } \\& & 35.32\end{array}$$ 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%.
-What is the risk neutral probability of an upward movement in the project cash flows during the first year of operations?

• A) 35.6%
• B) 40.3%
• C) 48.1%
• D) 59.7%

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Definitions:

Cash Received

Money that has been transferred into a company or individual's possession as payment for goods or services.

Cash Deposit

Funds placed in a financial institution for safekeeping, which can include cash or cash equivalents.

Liability Reported

The representation of an entity's obligations or debts on its financial statements, indicating amounts owed to creditors.

Income Statement

A document detailing a firm's income, outlays, and profit over a given timeframe.