Lavender Group (LVG) Ltd has not paid any dividends previously and expects to pay its first semi-annual dividend of $0.25 cents in one years time. LVG expects the earnings per share to grow at 8% p.a. compounded semi-annually for two years from today before reverting to a growth rate of 4% p.a. compounded semi-annually forever. LVG maintains a constant payout ratio. The shareholders of LVG require a return of 14.49% p.a. compounded annually.

• WhatshouldbethepriceofoneLVGsharetoday?
• Suppose you bought shares two years ago for $1.95 and sold them at the current price. What annually compounded rate of return would you have earned over the two years?