Up The Creek Adventure Company has had great success since first
going public and issuing ordinary shares three years ago. Earnings and
dividends have increased by 50 percent in each year and are expected to
do so for two more years. Starting with the third year, growth is expected
to fall to a more normal 6 percent. During the year just completed, the firm
paid a dividend of $1.00 per share. The required rate of return on Up The
Creek shares is 15 percent.
Calculate
a) What is the maximum price an investor should pay for a share in Up
The Creek?
$23.04
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b) What would the answer be for a) above if the 50 percent growth
was to last only one year rather than two?
$16.67