Problem:
Crunchy Chicken is launching an IPO. They are concerned about how to price the stock. Their investment bank suggests a price of $20 given their performance over the past 2 years. The Crunchy Chicken company paid a dividend of $1.25 per share in the next year. They anticipate that the company will continue to grow at a constant rate of 7%. They will have a required rate of return of 9%. Given this information is the price of $20 to high or to low?
What will happen to the price of the stock if the growth rate slows to 5% due to Asian Bird flu?
Some board members want to increase the dividend to $1.50. What will the new stock price be?