Common stock

valuelong dashVariable

growthNewman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned

$3.173.17

per share and paid cash dividends of

$1.471.47

per share

(D0equals=$ 1.47$1.47).

Grips' earnings and dividends are expected to grow at

4040%

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

55%

per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of

1414%

on investments with risk characteristics similar to those of Grips?

The maximum price per share that Newman should pay for Grips is

$nothing.

(Ro