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 nearestâ 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 nearestâ 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.
â(Select the best answerâ below.)
A.By increasing the risk of cash flows received from anâ asset, the required rate of returnâincreases, which reduces the value of the asset.
B.By increasing the risk of cash flows received from anâ asset, the required rate of returnâincreases, which increases the value of the asset.
C.By increasing the risk of cash flows received from anâ asset, the required rate of returnâdecreases, which reduces the value of the asset.
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