Reference no: EM132539459

Problem 1: If the risk-free rate is 6 percent and the expected rate of return on the market portfolio is 14 percent, is a security with a beta of 1.25 and an expected rate of return of 16 percent overpriced or underpriced?

Problem 2: (Calculation of balloon payment for a term loan) In March, the Cross National Bank agreed to finance the purchase of a new building for Harris Tweed's men's wear shop. The loan is for $300,000 and will carry a 12 percent annual rate of interest with annual compounding. The loan will require that Harris make four annual installments of $60,000 at the end of years 1 through 4. In year 5, Harris must make a large balloon payment which will fully retire the outstanding loan balance. What is the fifth-year balloon payment?

Problem 3: (Cost of an intermediate-term loan) The J. B. Marcum Company needs $250,000 to finance a new minicomputer. The computer sales firm has offered to finance the purchase with a $50,000 down payment followed by five annual installments of $59,663 each. Alternatively, the firm's bank has offered to lend the firm $250,000 to be repaid in five annual installments based on an annual rate of interest of 16 percent. Finally, the firm has arranged to finance the needed $250,000 through a loan from an insurance company requiring a lump-sum payment of $385,080 in 5 years.

a. What is the effective annual rate of interest on the loan from the computer sales firm?

b. What will the annual payments on the bank loan be?

c. What is the annual rate of interest for the insurance company term loan?