Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned$3.41 per share and paid cash dividends of$1.71per share(D0equals$ 1.71). Grips' earnings and dividends are expected to grow at20%per year for the next 3 years, after which they are expected to grow 5%per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 14% on investments 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$3.41 per share and paid cash dividends of$1.71per share(D0equals$ 1.71). Grips' earnings and dividends are expected to grow at20%per year for the next 3 years, after which they are expected to grow 5%per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 14% on investments with risk characteristics similar to those of Grips?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned$3.41 per share and paid cash dividends of$1.71per share(D0equals$ 1.71). Grips' earnings and dividends are expected to grow at20%per year for the next 3 years, after which they are expected to grow 5%per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 14%
on investments with risk characteristics similar to those of Grips?
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