## Question:

Currently the risk-free rate equals 3% and the expected return on the market portfolio is 8%. A financial analyst provides you with the following information Share Beta Expected Return
A 1.50 14%
B 0.60 8%
C 1.20 9%
D 1.80 10%
a. Indicate whether each share is overpriced, underpriced, or correctly priced.
b. Show how a smart investor could construct a portfolio of shares A and B that would outperform share D.

Use the information below for parts c – e.
Assume the cost of capital is 12%. Sharpe Manufacturing is considering the following projects:
c. Rank the projects based on NPV.
d. Which of the projects would Sharpe Manufacturing accept using the payback method if its policy is to accept all projects with a payback period of 2.75 years or less.

e. What are the internal rate of return and profitability index of Projects A, B and C
Year Project A Project B Project C
0 -20,000 -40,000 -70,000
1 18,000 5,000 30,000
2 18,000 10,000 30,000
3 18,000 30,000 40,000
4 80,000 50,000
5 100,000 180,000

Interest rates in Australia are currently at an all-time low. A few days earlier (in August 2017) Sam found her dream home. It’s priced at \$700,000. Sam plans to pay 10% of the house price from her savings. For the remaining 90% of the house price she has been offered a home loan at a very attractive annual interest rate of 3.5% by Star Bank. Sam can choose between a 20 or 25-year loan. She has to repay the loan through equal annual installments over the term of the loan. Her first installment of repayment will be in August 2018.
a. Assuming the interest rate remains constant over the entire loan term calculate Sam’s annual repayments for a 20-year loan and compare it with the repayments for a 25-yearloan.
b. Calculate and compare the total interest paid for a 20-year and 25-year loan.
c. Everything else remaining the same what is the relationship between the loan term and (i) annual repayments (ii) total interest paid Provide a brief explanation for your answer.

Interest rates seldom remain constant over the entire loan term. Suppose Sam’s home loan interest rate is fixed for the first 3 years. After 3 years, i.e., from August 2020, Sam will have to pay an annual interest rate of 6% for the remaining term of her home loan.
d. Calculate the annual loan repayments for Sam from August 2021 onwards if she had taken a 20-year loan originally. How does this compare with her repayments for a 25-year loan

a. Pick the month you were born. Draw the yield curve for that month in 2007 and 2008.Also, draw the yield curve for the month falling exactly in the middle. (For instance, if you were born in April, draw the yield curves for April 2007, October 2007 and April 2008.)
b. What should be the shape of the yield curve under normal circumstances Why
c. Compare the shapes of the three yield curves that you have drawn. From the yield curves,can you infer anything about the market’s expectation about the future of Australian economy

d. What is the yield on 2-year bond in January 2007 Under the expectations theory, what interest rate do investors expect on a 1-year bond next year (i.e., January 2008) Using the same method calculate the expected interest rates on 1-year bonds for all the months of 2008.

e. How do the expected interest rates compare with the actual interest rates in 2008 Do your calculations validate/not validate the expectations theory List some possible reasons why the expectations hypothesis may not hold.

For questions f – g, consider both Australian Government Bonds and NSW Treasury Bonds for the period January 2007 – December 2008.
f. For 3, 5 and 10 year bonds what was the average spread between Australian Government Bonds and NSW Treasury bonds Can you provide a reason for this
g. Draw a graph plotting the spread between Australian Government Bonds and NSW Treasury Bonds. Comment on the pattern of the spread. Can you provide an explanation for this pattern.

### Cite This Work

[Accessed 02 February 2023].

My Assignment Help. 'FIN205 Business Finance' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/fin205-business-finance/low-volatility.html> accessed 02 February 2023.

My Assignment Help. FIN205 Business Finance [Internet]. My Assignment Help. 2021 [cited 02 February 2023]. Available from: https://myassignmenthelp.com/free-samples/fin205-business-finance/low-volatility.html.

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