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Question 5 (16 marks) Andrew has $1,000,000 to invest in a risk-free asset, Stock BB, Stock TC and Stock MT respectively. By investing all money, he aims to create a portfolio that has an expected return of 8.92 percent. The following table shows the expected return of each investment assets: Investment asset Ex nected return % Risk-free asset 3.8 Stock BB 12.6 Stock TC 14.4 Stock MT 6.5 a) [f Andrew wants to invest $300,000 in the Risk-free asset, and the investment on Stock TC should be half of the investment in Stock MT, how much will he invest in each of these three stocks? (7 marks) b) If the expected return on the market portfolio is 11 percent, and the beta of Stock BB, TC and MT are 1.2, 1.5 and 0.8 respectively, with respect to the capital asset pricing model, is each of these three stocks overpriced or underpriced'? Briey explain. (9 marks) Question 6 (16 marks) A two-year project \"High Horizon\" will generate after-tax cash inow of $3,009,91 3 at the end of the rst year and $2,769,991.67 at the end of the second year. Your company currently has borrowing worth $149,815,110.40 for which the company is paying 7.4% per year as cost of debt, and the shareholders of the company have invested a total of $73,789,532; and they generally want a return of 15% per year. Corporate tax rate is at 37%. The project is somewhat riskier than the usual project your company undertakes, and the management therefore uses the subjective approach and applies an adjustment factor of +2.5% to the cost of capital for the project. a) If your company is evaluating a new investment project that has the same risk as the rm's typical project, what rate should your company use to discount the project's cash flows? Show your calculation. (6 marks) b) Under what circumstances in terms of the project cost should the company take on the project \"High Horizon\"? Apply NPV rule in your analysis. (5 marks) c) Discuss how your nding in part b) would go wrong if the rate in part a) is used to evaluate the project