Homework: Module 6 -Stock Valuation Save Score: O of 1 pt 12 of 15 (12 complete)
ID: 2782762 • Letter: H
Question
Homework: Module 6 -Stock Valuation Save Score: O of 1 pt 12 of 15 (12 complete) Hw Score: 73.33%, 11 of 15 pts P7-12 (similar to) Question Help * Common stock value-Variable growth Newman manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned $3.28 per share and paid cash dividends of S1.58 per share Don$1.58). Grips earnings and dividends are expected to grow at 40% 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 retu of 10% on investments with risk characteristics similar to those of Grips? The maximum price per share that Newman should pay for Grips is s(Round to the nearest cent)
Explanation / Answer
Dividend for year 1=(1.58*1.4)=2.212
Dividend for year 2=(2.212*1.4)=3.0968
Dividend for year 3=(3.0968*1.4)=4.33552
Value after year 3=(Dividend for year 3*Growth rate)/(Required return-Growth rate)
=(4.33552*1.05)/(0.1-0.05)=$91.04592
Hence current price=Future dividends*Present value of discounting factor(10%,time period)
=2.212/1.1+3.0968/1.1^2+4.33552/1.1^3+$91.04592/1.1^3
=$76.23(Approx).
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