QUESTION 8 2.5 points The CEO of a U.S. based multinational corporation is havin

Question

QUESTION 8 2.5 points The CEO of a U.S. based multinational corporation is having a discussion with his CFO during lunch time; they agree on some points and politely disagree on others. The conversation is about the relationship between/among some of the variables affecting the profitability of the firm. The discussion focuses on the following: "The risk of a p he project's variability in cash flows isand the positive correlation between the project's cash flow and the MNC's cash flow is roject will be lower, ift If you were listening to the converation, what would you agre on? higher, lower lower; higher higher, higher lower; lower

Explanation / Answer

The risk of a project will be lower, if the project's variability in cash flows is lower, and the positive correlation between the project's cash flow and MNC's cash flow is higher.

Lower variability would mean less fluctuations in expected cash flow. Positive correlation means that if MNC's cash flow goes up, the project's cash flow will also go up. So, company is in a better position to predict cash flows in case of higher positive correlation.

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