Calculate the market premium

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Reference no: EM132068149

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.

Reference no: EM132068149

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