In: Finance
Laura Drake wishes to estimate the value of an asset expected to
provide cash inflows of...
Laura Drake wishes to estimate the value of an asset expected to
provide cash inflows of $1,800 for each of the next 4 years and
$8,356 in 5 years. Her research indicates that she must earn 4% on
low-risk assets, 8% on average-risk assets, and 13% on high-risk
assets.
- Determine what is the most Laura should pay for the asset if it
is classified as (1) low-risk (2) average-risk (3) high-risk.
- 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, what is the most she would
pay? Why?
- All else being the same, what effect does increasing risk have
on the value of the asset? Explain in light of your findings in
part a.