Based on the following projected returns compare investment performance under the following scenarios. The figures are projected quarterly returns, are over an 8-year investment horizon, and involve an initial investment of $250m. Explain the differences in the risk-adjusted performance between the alternative scenarios.

a) Ungeared
b) 60% gearing at a 6.25% fixed rate. Periodic payments interest only with a balloon payment
of $250 at the end of year 8.
c) 70% gearing at a 6.70% fixed rate. Periodic payments include an equal installment repayment
of principal of $4m per quarter. The remaining outstanding principal is paid in a balloon
payment at the maturity of the loan.

Answer rating: 100% (QA)

The riskadjusted performance of the investments would be different under the alternative scenarios Ungeared In this scenario there is no debt financin... View the full answer