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 Summary
The solution explains how to calculate the value of a stock under variable growth rates
Solution Preview
The price will be the present value of all dividends. Since the growth rate changes, we need to calculate the dividends ...
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