a) Nustar Corp. is considering issuing shares to raise capital. If the company pays its creditors a return of 8% p.a., would the potential shareholders expect a return higher or lower than 8% p.a.? Explain your answer. [3 marks]

b) Nustar has a beta of 1.5. The long-term return of the ASX200 (i.e. the market portfolio) is 8% p.a. and the market risk premium is 5% p.a. Using CAPM, calculate the expected rate of return of Nustar company. [4 marks]

c) If Nustar is expected to pay a dividend of $0.5 per share at the end of year 4 and dividends will grow at a constant rate of 3% per annum forever. What is the implied value of a Nustar share today? [6 marks]

d) If each Nustar share is selling for $5.4, would you purchase it and why? [2 marks]