P 7-12. Common stock valueVariable growth

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 (

D

0

_$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 investments with risk

characteristics similar to those of Grips?