a)This is a two period certainty model problem.

Assume that Jack Black has a sole income from Wildcat Ltd in which he owns 10% of the ordinary share capital.

In its financial year 2016-17 just ended, Wildcat Ltd reported net profits after tax of $500,000, and announced its net profits after tax expectation for the next financial year, 2017-18, to be 20% higher than this years figure. The company operates with a dividend payout ratio of 60%, which it plans to continue, and will pay the annual dividend for 2016-17 in mid-May 2017, and the dividend for 2017-18 in mid-May, 2018.

In mid-May, 2017, Jack wishes to spend $40,000. How much can he consume in mid-May, 2018 if the capital market offers an interest rate of 8% per year?

b)This question relates to the Capital Asset Pricing Model (CAPM)

Fresh Fysh Ltd owns shares in four different companies, as set out below, and -based on their current share prices expects the following returns.

Company NameExpected Return (%)Beta

Prawn Ltd10.8%0.5

Salmon Ltd13.0%0.8

Shark Ltd15.6%1.2

Trout Ltd17.4%1.7

The risk free rate of interest is currently 6% and the market risk premium is 8%.

i)Based on the CAPM, which of the above shares are undervalued, overvalued or correctly valued on the share market? Show all calculations and reasons for your answers.

ii)Using the above information, draw a Security Market Line graph, and plot all securities on the chart.