Zeta Corporation Plans to Invest in a Project $\pi$ )Associated with the Valuation of the Market Portfolio

question 19

Multiple Choice

Zeta Corporation plans to invest in a project.The initial investment is €200 million and the next year's cash flow will be €20 million.There will be a perpetual annual cash flow stream of either €15 million or €4 million will occur each year thereafter,depending on whether the economy is good or bad one year from now.Assuming that the risk-free interest rate is 5 per cent per year,and that €1.00 invested in the market portfolio today will be worth either €1.30 (if the economy does well) or €0.80 (if the economy does poorly) .Calculate the risk-neutral probability ( $\pi$ ) associated with the valuation of the market portfolio.

• A)0.8
• B)0.25
• C)1
• D)0.5

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Definitions:

Taxation Principle

The underlying rules and theories that guide how taxes are levied on individuals and companies, focusing on equity, efficiency, and simplicity.

Excise Tax

A tax levied on the production of a specific product or on the quantity of the product purchased.

Income Tax

A tax levied by governments on individuals' or entities' income, which can vary depending on the amount of income earned.

Regressive Tax

A tax where the tax rate decreases as the taxpayer's income increases, placing a heavier burden on lower-income individuals.