Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just​ completed, Grips earned ​$3.95 per share and paid cash dividends of ​$2.25 per share ​(D0equals=$ 2.25​). ​ Grips' earnings and dividends are expected to grow at 25​% per year for the next 3​ years, after which they are expected to grow 6​% per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 11​% on investments with risk characteristics similar to those of​ Grips?

Question

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

​$3.95

per share and paid cash dividends of

​$2.25

per share

​(D0equals=$ 2.25​).

​ Grips' earnings and dividends are expected to grow at

25​%

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

6​%

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

11​%

on investments with risk characteristics similar to those of​ Grips?  

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