Question: 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

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

$3.28

per share and paid cash dividends of

$1.58

per share

(D0equals=$ 1.58).

Grips' earnings and dividends are expected to grow at

35%

per year for the next 3 years, after which they are expected to grow

7%

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?

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