Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Chapter 6, Problem 6.14P
Subpart (a)
Summary Introduction
To determine: How much the investor pay for low, average and high risk asset.
Subpart (b)
Summary Introduction
To discuss: Maximum price the investor should pay.
Subpart (c)
Summary Introduction
To discuss: What effect of increases in risk on value of asset.
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5.
Asset valuation and risk Laura Drake wishes to estimate the value of an
asset expected to provide cash inflows of $3,000 per year at the end of years 1
through 4 and $ 1000 at the end of year 5. Her research indicates that she
must earn 10% on low-risk assets, 15% on average-risk assets, and 22% 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.
Laura Drake wishes to estimate the value of an asset expected to proved cash inflows of $4,000 for each of the next 4 years and $21,749 in 5 years. Her research indicates that she must earn 5% on low risk assests, 7% on average risk assets, and 13% on high risk assests.
a. Determine what is the most Laura should pay for the asset if it is classififed as (1) low risk, (2) average risk, and (3) high risk.
b. Suppose Luara is unable to assess the risk of the asset and wants to be certain she's making a good deal. On a the basis of your finding 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 finding in part a.
You have been asked to estimate the market value of an income-producing property. The table below
provides 5 years of projected cash flows for the property. Use the discounted cash flow approach to income
valuation to calculate the market value. Assume that you sell the property at the end of year 5 and that the
net proceeds from the sale are $5 million. Also assume that the discount rate is 10%.
PGI
EGI
NOI
Year 1
$4.18 million
$750,000
$780,000
$811,200
$637,500
$663,000
$689,520
$318,750 $331,500 $344,760
$6.11 million
$4.12 million
Year 2
$4.40 million
Year 3
Year 4
$843,648
$717,101
$358,550
Year 5
$877,394
$745,785
$372,892
Chapter 6 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 6.1 - What is the real rate of interest? Differentiate...Ch. 6.1 - What is the term structure of interest rates, and...Ch. 6.1 - For a given class of similar-risk securities, what...Ch. 6.1 - Prob. 6.4RQCh. 6.1 - List and briefly describe the potential issuer-...Ch. 6.2 - What are typical maturities, denominations, and...Ch. 6.2 - Differentiate between standard debt provisions and...Ch. 6.2 - How is the cost of bond financing typically...Ch. 6.2 - Prob. 6.9RQCh. 6.2 - Prob. 6.10RQ
Ch. 6.2 - Compare the basic characteristics of Eurobonds and...Ch. 6.3 - Why is it important for financial managers to...Ch. 6.3 - Prob. 6.13RQCh. 6.3 - Prob. 6.14RQCh. 6.3 - Prob. 6.15RQCh. 6.4 - Prob. 6.16RQCh. 6.4 - What relationship between the required return and...Ch. 6.4 - If the required return on a bond differs from its...Ch. 6.4 - As a risk-averse investor, would you prefer bonds...Ch. 6.4 - What is a bonds yield to maturity (YTM)? Briefly...Ch. 6 - Learning Goals 5, 6 ST6- 1 Bond valuation Lahey...Ch. 6 - Learning Goal 1 E6-1 The nominal, risk-free rate...Ch. 6 - The yields for Treasuries with differing...Ch. 6 - The YTMs for Treasuries with differing maturities...Ch. 6 - Assume that the rate of inflation expected over...Ch. 6 - Calculate the risk premium for each of the...Ch. 6 - You have two assets and must calculate their...Ch. 6 - Prob. 6.7WUECh. 6 - Assume a 5-year Treasury bond has a coupon rate of...Ch. 6 - Interest rate fundamentals: The real rate of...Ch. 6 - Prob. 6.2PCh. 6 - Prob. 6.3PCh. 6 - Yield curve A firm wishing to evaluate interest...Ch. 6 - Term structure of interest rates The following...Ch. 6 - Bond interest payments before and after taxes...Ch. 6 - Prob. 6.11PCh. 6 - Prob. 6.13PCh. 6 - Prob. 6.14PCh. 6 - Bond valuation: Annual interest Calculate the...Ch. 6 - Prob. 6.20PCh. 6 - Bond valuation: Semiannual interest Find the value...
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