HFC is a privately held chain restaurant that sells fried chicken throughout the US. The owner of HFC, Hazel Faccio, is considering an initial public offering of common stock to take place on Sep 1, 2010. 

Hazel and other potential investors do not expect the company to pay any  dividends for the next three years. But in 2014, the company is expected to pay a  dividend of $0.50 per share on Aug 31. The dividend is expected to increase by  10% in 2015 such that a dividend of $0.55 per share will be paid on Aug 31, 2015. 

The following year the dividend is expected to grow by 9% and thereafter to increase at 5% per year in perpetuity. 

• Assume that investors are expected to earn a return of 10% on stocks like HFC. 

Questions:

• What will be the expected price per share of the IPO on Sep 1, 2010? 

• What will be the expected price per share on Sep 1, 2017? 

Answer rating: 100% (QA)

SOLUTION The expected price per share of the IPO on Sep 1 2010 can be calculated using the following formula Price D1 R g where D1 Expected dividend i... View the full answer