Common stock valuelong dash—Variable growth Newman Manufacturing is considering a cash purchase of the stock of...
Common stock valuelong dash—Variable growth Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned $3.363.36 per share and paid cash dividends of $1.661.66 per share (D0equals=$ 1.66$1.66). Grips' earnings and dividends are expected to grow at 3030% per year for the next 3 years, after which they are expected to grow 88% per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 1515% on investments with risk characteristics similar to those of Grips? The maximum price per share that Newman should pay for Grips is $nothing. (Round to the nearest cent.)
Homework Answers
Maximum share price will be equal to the present value of future dividends.
= 1.66(1.3)/(1.15) + 1.66(1.3)2/(1.15)2+1.66(1.3)3/(1.15)3 + 1.66(1.3)3(1.08)/(15%-8%)*(1.15)3
= $43.39
Hence, maximum price per share that Newman should pay for Grips is $43.39
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