Question

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.)

Answer 1

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