Assume a Project Has Normal Cash Flows (I

question 28

Multiple Choice

Assume a project has normal cash flows (i.e., initial cash flow is negative, and all other cash flows are positive) . Which of the following statements is most correct?

• A)All else equal, a project's IRR increases as the required rate of return declines.
• B)All else equal, a project's NPV increases as the required rate of return declines.
• C)All else equal, a project's IRR is unaffected by changes in the required rate of return.
• D)Answers a and b are both correct.
• E)Answers b and c are both correct.

---

Definitions:

In-the-money

An option is in-the-money when it has intrinsic value, meaning for a call option, the market price is above the strike price, and for a put option, below the strike price.

Black-Scholes Model

A mathematical model used for pricing European-style options and assessing the options' market value based on factors such as volatility, risk-free rate, and time to expiration.

Exercised

Refers to the act of implementing the rights granted by a financial contract, commonly in options trading where a buyer may execute the option.

Hedge Ratios

Financial ratios used to calculate the optimal amount of exposure needed to hedge (protect against risk) a position or portfolio.