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?

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.

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?  

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

Answer rating: 100% (QA)

a Potential investors would expect a return of more than 8 per year This is because shareho... View the full answer