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Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $3800 per year at the end of years 1 through 4 and $21096 at the end of year 5 Her research indicates that

Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $3,800 per year at the end of years 1 through 4 and $21,096 at the end of year 5. Her research indicates that she must earn 12% on low risk assets, 17% on average risk assets, and 21% on high risk assets.

A. determine what is the most Laura should pay for she asset if it is classified(1) low risk, (2) average risk, and (3) high risk (Round to the nearest​ cent.)

B. Suppose Laura is unable to assess the risk of the asset and wants to be certain she is making a good deal. On the basis of your findings in part A, what is the most she should pay? Why? (Round to the nearest​ cent.)

C. All else being the same, what effect does increasing risk have on the value of an asset? Explain in light of your findings in 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 reduces the value of the asset.

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

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

 

Aug 14 2020 View more View Less

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