Laura wishes to estimate the value of an asset expected to provide cash inflows of $2,700 per year at the end of years 1 through 4 and $12,592 at the end of year 5. Her research indicates that she must earn 11% on low-risk assets, 18% on average-risk assets, and 21% on high-risk assets.
1) 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 1., the most she should pay is ________________?
3) All else being the same, what effect does increasing risk have on the value of an asset? Select the best answer below.
a. By increasing the risk of cash flows received from an asset, the required rate of return increase, which increases the value of the asset. b. By increasing the risk of cash flows received from an asset, the required rate of return decreases, which reduces the value of the asset. c. By increasing the risk of cash flows from an asset, the required rate of return increases, which reduces the value of the asset