You discover an investment costing $500 which has an expected total return of 12% pa, but a required return of only 10% pa. Of the 12% pa total expected return, the capital return is expected to be 7% pa. Assume that the required return of 10% remains constant, the dividends can only be re-invested at 10% pa and all returns are given as effective annual rates.

Which of the following statements is NOT correct?

a.

The expected dividend return is 5%

b.

The investment is currently under-priced

c.

You would use a discount rate of 10% to find the NPV of this investment

d.

When plotted on the Security Market Line, the investment would plot below the SML.

e.

The investments price at time t=20 would be $1,934.842