Bubs Australia is a public listed company in ASX. It is considering issuing ordinary shares to raise capital.

a) Bubs Australia has a Beta of 1.2. The long-term return of the ASX200 (i.e. the market portfolio) is 8% per annum, and the market risk premium is 5%.

a1.Without calculation, use the meaning of Beta to explain if Bubs Australias expected rate of return would be higher or lower than the market portfolio return?

a2.Using CAPM, calculate the expected rate of return of Bubs Australia.

b) If the company is expected to pay a dividend of $0.2/share at the end of year 3 and dividends will grow at a constant rate of 2% per annum forever, what is the implied value of a Bubs Australia share today?

c) If Bubs Australia intends to sell the shares at $3/share, would you purchase them? Briefly explain why?

d) Bubs Australia is also considering issuing some preference shares. Would the preference shareholders expect a higher or lower return than the ordinary shareholders? Briefly explain why.