(Round to the nearest
cent)Homework Answers
D0 = $1.92
Growth rate for next 3 years is 30% and a constant growth rate (g) of 9% thereafter
D1 = $1.92 * 1.30 = $2.496
D2 = $2.496 * 1.30 = $3.2448
D3 = $3.2448 * 1.30 = $4.21824
D4 = $4.21824 * 1.09 = $4.5978816
Required Return, rs = 14%
P3 = D4 / (rs - g)
P3 = $4.5978816 / (0.14 - 0.09)
P3 = $4.5978816 / 0.05
P3 = $91.957632
P0 = $2.496/1.14 + $3.2448/1.14^2 + $4.21824/1.14^3 +
$91.957632/1.14^3
P0 = $69.60
So, Newman Manufacturing should pay a maximum price of $69.60 per share.
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