a) L.G. Ltd. is considering issuing ordinary shares to raise capital. If the company pays its capital creditors a return of 5% per annum, would the potential ordinary shareholder expect a return higher or lower than 5%? Explain your answer.

b) L.G. Ltd. has a beta of 0.9. The long-term return of the ASX200 (i.e. the market portfolio) is 10% per annum and the market risk premium is 6%. Using CAPM, calculate the expected rate of return of L.G. Ltd.

c) The company is expected to pay a dividend of $2.5/share at the end of year 2 and dividends will grow at a constant annual rate forever. If L.G. intends to sell the shares at $35/share, what is the minimum yearly dividend growth rate you would require so to purchase the shares?

d) Assume the earnings per share of L.G. Ltd. is expected to be $7. The average P/E ratio for the industry is 3. If you expect L.G. Ltd. to be an average firm in terms of the growth rate and risk in the industry, use the P/E ratio to identify if you should pay $35/ share to purchase the shares. Explain briefly.