Currently, the risk-free rate equals 5% and forecasted equity risk premium is 6%.An investment analyst provides you with the following information with regards to two companies:

Company 1: Castaway Ltd: Shares sell for $30 and it is forecasted that the stock will be worth $33 next year (assume no dividends). The beta is 0.7.

Company 2: Treasure Ltd: Shares sell for $20 and it is forecasted that the stock will be worth $22.40 next year (assume no dividends). The beta is 1.33.

1.Indicate whether each share is overpriced, underpriced or correctly priced. Support with relevant working.

2.Which of the two shares should the investment analyst advise to purchase and why?