Question: 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.
(b) Calculate an investor's required rate of return for the company's shares.
(c) Calculate the intrinsic value of a share in the company if this year's dividend (the current dividend) is $3 per share.
(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.
(e) Calculate the intrinsic value of a share in the company if last year's dividend was $3 per share.
(f) Calculate the intrinsic value of a share in the company if next year's dividend is predicted to be $3 per share.
(g) Explain why Australian Commonwealth Government Treasury Bonds are considered to be risk-free.