Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $1,400 per year at the end of years 1 through 4 and ?$7,576 at the end of year 5. Her research indicates that she must earn 9?% on? low-risk assets, 14?% on? average-risk assets, and 21?% on? high-risk assets.
a) The most Laura should pay for the asset if it is classified as? low-risk is _____
b) The most Laura should pay for the asset if it is classified as? average-risk is _____
c) The most Laura should pay for the asset if it is classified as? high-risk is ______
2) Suppose Laura is unable to assess the risk of the asset and wants to be certain? she's making a good deal. On the basis of your findings in part a? ,the most she should pay is ______
3) 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 (select best answer)
a) By increasing the risk of cash flows received from an? asset, the required rate of return? decreases, 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 reduces the value of the asset.
c) By increasing the risk of cash flows received from an? asset, the required rate of return? increases, which increases the value of the asset.