The Sunnyvale Manufacturing Company has had great success since first going public and issuing ordinary shares three years ago. Earnings and dividends have increased by 50% 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% which will continue for the foreseeable future.

During the year just completed, the company paid dividends of $1 per share. The required rate of return on Sunnyvale shares is 12%.

Required:

a) What is the maximum price an investor should pay for shares in the company today? (Show all workings).

(3 marks are allocated to this part of the question)

b) What would the answer be for part a) of this question if the 50% growth rate was to last only one more year rather than two? (Show all workings).

(3 marks are allocated to this part of the question)