Drake wishes to estimate the value of an asset expected to provide cash inflows of $1,500 for each of the next 4 years and $8,601 in 5 years. Her research indicates that she must earn 4% onlow-risk assets, 9% onaverage-risk assets, and 15% onhigh-risk assets.

a. (1) The most Laura should pay for the asset if it is classified aslow-risk is $__________?

(2) The most Laura should pay for the asset if it is classified asaverage-risk is $_________?

(3) The most Laura should pay for the asset if it is classified ashigh-risk is $_________?

b. Suppose Laura is unable to assess the risk of the asset and wants to be certainshe's making a good deal. On the basis of your findings in part a, the most she should pay is $__________? (Round to the nearestcent.)

c. All else being thesame, what effect does increasing risk have on the value of anasset? Explain in light of your findings in part a. (Select the best optionbelow.)

1. By increasing the risk of cash flows received from anasset, the required rate of returnincreases, which increases the value of the asset.

2. By increasing the risk of cash flows received from anasset, the required rate of returnincreases, which reduces the value of the asset.

3. By increasing the risk of cash flows received from anasset, the required rate of returndecreases, which reduces the value of the asset.

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