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[solution]: Up The Creek Adventure Company has had great success since first


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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?

(b) What would the answer be for a) above if the 50 percent growth was to last only one year rather than two?


Please show working with formula. Thank you.

 


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