5. An asset is expected to pay $400, $300, and $500 respectively at the end of Year 1, Year 2, and Year 3. Assume that the market interest rate on assets of similar risk is 8%. a) What is the opportunity cost of investing in this asset? Explain. b) What should be the market price of this asset? Show calculations. c) If you purchase the asset now, at the price calculated above, calculate your expected the rate of return on the asset for Year 1, and check if it is the same as the discount rate used in Part (b). d) What is the expected rate of return from this asset for Year 2? e) What do you learn from above about the relation between the discount rate used in asset valuation and the expected return from the asset? a) A firm is expected to have no growth in all the coming years, and therefore will pay out all its earnings to its shareholders each year. What is your best estimate of its PE ratio given that people require 10% return on investment in its equity? b) Alternatively, suppose that this firm can achieve 8% growth of earnings each year in all the coming years if it reinvests 40% of its earnings each year to expand its operation, and that this is what the firm is doing. What is your best estimate of its PE ratio? c) How do you adjust your estimate above (upward or downward) if you know that the growth opportunity as described above will last only in the foreseeable future, but not forever