Question $1$

Asset valuation and risk Personal Finance Problem Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $$2,700$ for each of the next $4$ years and $$13,633$ in $5$ years. Her research indicates that she must earn $5\%$ on low$-$risk assets, $8\%$ on average$-$risk assets, and $15\%$ on high$-$risk assets.

a$.$ Determine what is the most Laura should pay for the asset if it is classified as $(1)$ low$-$risk, $(2)$ average$-$risk, and $(3)$ high$-$risk.

b$.$ 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 should pay? Why?

c$.$ 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 a$.$

a$.(1)$ The most Laura should pay for the asset if it is classified as low$-$risk is $ $($Round to the nearest cent.$)$

Question $8$

Common stock value$-$Variable growth Personal Finance Problem Home Place Hotels, Inc., is entering into a $3-$year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when it is complete, it should allow the company to enjoy much improved growth in earnings and dividends. Last year, the company paid a dividend of $$3\mathrm{.}60.$ It expects zero growth in the next year. In years $2$ and $3,3\%$ growth is expected, and in year $4,16\%$ growth. In year $5$ and thereafter, growth should be a constant $7\%$ per year. What is the maximum price per share that an investor who requires a return of $17\%$ should pay for Home Place Hotels common stock?

The maximum price per share that an investor who requires a return of $17\%$ should pay for Home Place Hotels common stock is $ $($Round to the nearest cent.$)$

Question $9$

Long$-$term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs $$6,500$ today and promises to pay $$2,300,$$$2,400,$$$2,400,$$$2,000$ and $$1,700$ over the next $5$ years. Or$,$ Bill can invest $$6,500$ in project $B$ that promises to pay $$1,500,$$$1,500,$$$1,500,$$$3,600$ and $$3,900$ over the next $5$ years. $($Hint: For mixed stream cash inflows, calculate cumulative cash inflows on a year$-$to$-$year basis until the initial investment is recovered.$)$

a$.$ How long will it take for Bill to recoup his initial investment in project $A?$

b$.$ How long will it take for Bill to recoup his initial investment in project $B?$

c$.$ Using the payback period, which project should Bill choose?

d$.$ Do you see any problems with his choice?

a$.$ For Bill to recoup his initial investment in project $A,$ it will take years. $($Round to two decimal places.$)$