The rate of return for bonds issued by the Australian Commonwealth Government Treasury is given as 2% per annum. The return for the Australian share market is given as 12% per annum. Suppose a listed company has a beta value of 0.8. The dividend payments for the company are expected to grow at 6% per year.

(a) Calculate the market premium. (2 marks)

(b) Calculate an investors required rate of return for the companys shares. (3 marks)

(c) Calculate the intrinsic value of a share in the company if this years dividend (the current

dividend) is $3 per share. (3 marks)

(d) Using your answer to part (c), if the market price of a share in the company is $70, would you

buy shares in the company? Explain your answer. (2 marks)

(e) Calculate the intrinsic value of a share in the company if last years dividend was $3 per

share. (4 marks)

(f) Calculate the intrinsic value of a share in the company if next years dividend is predicted to

be $3 per share. (2 marks)

(g) Explain why Australian Commonwealth Government Treasury Bonds are considered to be

risk-free. (2 marks)