Asset valuation and riskââPersonal Finance ProblemâââLaura Drake wishes to estimate the value of an asset expected to provide cash inflows of
$ 3 comma 900$3,900
per year at the end of years 1 through 4 and
â$22 comma 89222,892
at the end of year 5. Her research indicates that she must earn
88â%
onâ low-risk assets,
1414â%
onâ average-risk assets, and
2121â%
onâ high-risk assets.
a.ââDetermine what is the most Laura should pay for the asset if it is classified asâ (1) low-risk,â (2) average-risk, andâ (3) high-risk.
b.ââSuppose Laura is unable to assess the risk of the asset and wants to be certainâ she's making a good deal. On the basis of your findings in part
aâ,
what is the most she shouldâ pay? Why?c. All else being theâ same, what effect does increasing risk have on the value of anâ asset? Explain in light of your findings in part
a.
a. â (1) The most Laura should pay for the asset if it is classified asâ low-risk is
â$nothing.
â(Round to the nearestâ cent.)â(2) The most Laura should pay for the asset if it is classified asâ average-risk is
â$nothing.
â (Round to the nearestâ cent.)â(3) The most Laura should pay for the asset if it is classified asâ high-risk is
â$nothing.
â(Round to the nearestâ cent.)b.ââSuppose Laura is unable to assess the risk of the asset and wants to be certainâ she's making a good deal. On the basis of your findings in part
aâ,
the most she should pay is
â$nothing.
â(Round to the nearestâ cent.)c. All else being theâ same, what effect does increasing risk have on the value of anâ asset? Explain in light of your findings in part
a.
â(Select the best answerâ below.)