Common stock value long dash variable growth newman manufacturing is considering a cash purchase of the stock of grips tool. during the year just completed, grips earned $4.13 per share and paid cash dividends of $2.43 per share (d0 equals$ 2.43). grips' earnings and dividends are expected to grow at 25% per year for the next 3 years, after which they are expected to grow 8% 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? the maximum price per share that newman should pay for grips is $.

$56.78

Explanation:

Find dividend per year;

D1 = D0 (1+g) = 2.43 (1.25) = 3.0375

D2 = 3.0375(1.25) = 3.7969

D3 = 3.7969 (1.25) = 4.7461

D4 = 4.7461 (1.08) = 5.1258

Next, find the present values (PVs) of each dividend at 15% required return;

PV(D1) = 3.0375/ 1.15 = 2.6413

PV(D2) = 3.7969/ 1.15² = 2.8710

PV(D1) = 4.7461 / 1.15³ = 3.1206

PV of terminal cashflow (D4 onwards) = = 48.1471

Sum up the PVs to get the price per share;

= 2.6413 + 2.8710 + 3.1206 + 48.1471

= 56.78

Therefore, price = $56.78

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