Sources of finance a. The current yield curve for risk-free zero-coupon bonds is given below: Years to maturity Interest rate (%6, p.a) 1 5.00 2 5.65 |3 6.25 4 6.75 5 7.50 i. Assuming that the expectations theory holds for this term structure, calculate the expected one-year spot rates for the second, third and fourth year. ii. Using the expectation theory, what is/are the reason(s) for the shape of the above yield curve? iii. Using the liquidity premium theory, what is/are the reason(s) for the shape of the above yield curve? b. Estimate the price of a share that has just paid an annual dividend of $1.5 per share assuming that dividends are expected to grow at a rate of 7% p.a. for the next year, a further 12% for the second year and then a further 5% p.a. thereafter. Assume dividends are paid at each year-end and that the required rate of return on equity is 11% p.a.