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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, 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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