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Test: Comprehensive Final Exam Time Remaining: 01:50-42 Submit Test This Question: 4 pts | 1 of 41 (0 complete) This Test: 160 pts possible Common stock value-Variable growth Newman manufacturing is considening a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned $3.15 per share and paid cash dividends of $1.45 per share (Do $1.45) Grips earnings and dividends are expected to grow at 40% per year for the next 3 years, after which they are expected to grow 9% per year to infinity What is the maximum price per share that Newman should pay for Gnps if it has a required return of 13% on investments with risk characteristics similar to those of Grips? The maximum price per share that Newman should pay for Grips is (Round to the nearest cent.) ti..

Explanation / Answer

Year Dividends/Share price Present value@13% Discounted cashflow 1 2.03 0.885 1.80 2 2.84 0.783 2.23 3 3.98 0.693 2.76 3 108.455 0.693 75.16 Maximum price 81.94 Share price at the end of Year 3= D3*(1+g)/Ke-g $3.98*(1+0.09)/0.13-0.09 $4.3382/0.04 = $108.455

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