90.2K

Verified Solution

Link Copied!

aura Drake wishes to estimate the value of an asset expected toprovide cash inflows of

$ 3 comma 500$3,500

for each of the next 4 years and

?$14 comma 77114,771

in 5 years. Her research indicates that she must earn

44?%

on? low-risk assets,

88?%

on? average-risk assets, and

1616?%

on? high-risk assets.

a.??Determine what is the most Laura should pay for the asset ifit is classified as? (1) low-risk,? (2) average-risk, and? (3)high-risk.

b.??Suppose Laura is unable to assess the risk of the asset andwants to be certain? she's making a good deal. On the basis of yourfindings in part

a?,

what is the most she should? pay? Why?

c. All else being the? same, what effect does increasing riskhave on the value of an? asset? Explain in light of your findingsin part

a.

a. ? (1) The most Laura should pay for the asset if it isclassified as? low-risk is

?$nothing.

?(Round to the nearest? cent.)

?(2) The most Laura should pay for the asset if it is classifiedas? average-risk is

?$nothing.

? (Round to the nearest? cent.)

?(3) The most Laura should pay for the asset if it is classifiedas? high-risk is

?$nothing.

?(Round to the nearest? cent.)

b.??Suppose Laura is unable to assess the risk of the asset andwants to be certain? she's making a good deal. On the basis of yourfindings in part

a?,

the most she should pay is

?$nothing.

?(Round to the nearest? cent.)

c. All else being the? same, what effect does increasing riskhave on the value of an? asset? Explain in light of your findingsin part

a.

?(Select the best answer? below.)

A.

By increasing the risk of cash flows received from an? asset,the required rate of return?increases, which increases the value ofthe asset.

B.

By increasing the risk of cash flows received from an? asset,the required rate of return?increases, which reduces the value ofthe asset.

C.

By increasing the risk of cash flows received from an? asset,the required rate of return?decreases, which reduces the value ofthe asset.