When Answering the Questions Below, Refer to the Following Table

question 4

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 the first two years of the project cash flows moving down?

• A) 40.3%
• B) 48.0%
• C) 52.0%
• D) 59.7%

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