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 (D0=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 investment with risk characteristics similar to those of Grips?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 (D0=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 investment with risk characteristics similar to those of Grips?

Answer provided by professor. Need to know how to solve PV of Dividends and the PV of $72.04. I dont have a finance calculator to solve this problem.

t	D0	1.25^t	Dt	1/(1.15)^t	PV of Dividends
1	$2.55	1.2500	$3.19	0.8696	$2.77
2	2.55	1.5625	3.98	0.7561	3.01
3	2.55	1.9531	4.98	0.6575	3.27
					9.05

Step 3: PV of price of stock at end of initial growth period D(3 + 1) = $4.98 (1 + 0.10); D4 = $5.48 P3 = [D4 (rs g2)]; P3 = $5.48 (0.15 0.10);

P3 = $109.56 PV of stock at end of year 3

N = 3, I = 15%, FV = $109.60; PV = $72.04

Step 4: Sum of PV of dividends during initial growth period and PV price of stock at end of growth period P0 = $9.05 + $72.04 P0 = $81.09