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Common stock value - Variable growth. Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed,...

Common stock value - Variable growth. Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, grips earned $4.25 per share and paid cash dividends of $2.55 per share (Do = $2.55). Grips' earnings and dividends are expected to grow at 25% per year for the next 3 years, after which they are expected to grow at 10% per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 15% on investments with risk characteristics similar to those of Grips?

This question was asked on Jan 21, 2013.

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