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    Common stock value-Variable growth

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    Newman Manufacturing is considering a cash purchase of the stock of Grip's Tool. During the year just completed, Grips earned $4.25 per share and paid cash dividends of $2.55 per share (D0 = $2.55). Grip's earnings and dividends are expected to grow at 25% per year for the next 3 years, after which they are expected to grow at 10% 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?

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    Solution Preview

    The price will be the present value of all dividends. Since the growth rate changes, we need to calculate the dividends ...

    Solution Summary

    The solution explains how to calculate the value of a stock under variable growth rates