The Board of Directors of Whazzup, Inc. is planning the company's initial public offering (IPO) of common stock. Whazzup's chief financial officer (CFO), Chiquita Banana, is conducting an analysis to estimate the price at which the stock will trade. It is now Januaary 1, 2002. The company has never paid a dividend, but expectes to pay a dividend of $0.75 per share on December 31, 2005 and on December 31, 2006. Ms. Banana expects the dividend to grow by 7% from 2006 to December 31, 2007, and by 5% the following year. Thereafter, (i.e., from 2009 onward) the dividend is expected to grow by 3% per year forever.
Investors requrie a return of 12% per year on stocks like Whazzup. Management expects to issue 5,000,000 shares.
a. What is the likely initial price for Whazzup's stock as of January 1, 2002?
b. What will be the total market value of Whazzup's common stock as of January 1, 2002?
c. What will the price of the stock be on January 1, 2006, just after the dividend is paid?