Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned$3.41 per share and paid cash dividends of$1.71per share(D0equals$ 1.71). Grips' earnings and dividends are expected to grow at20%per year for the next 3 years, after which they are expected to grow 5%per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 14% on investments with risk characteristics similar to those of Grips?
Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned$3.41 per share and paid cash dividends of$1.71per share(D0equals$ 1.71). Grips' earnings and dividends are expected to grow at20%per year for the next 3 years, after which they are expected to grow 5%per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 14% on investments with risk characteristics similar to those of Grips?
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 11P
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Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned$3.41 per share and paid cash dividends of$1.71per share(D0equals$ 1.71). Grips' earnings and dividends are expected to grow at20%per year for the next 3 years, after which they are expected to grow 5%per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 14%
on investments with risk characteristics similar to those of Grips?
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