Bonnie is concerned she may not have enough money to expand the company given how quickly the industry is doing. She is thinking of asking external parties to contribute capital into a business. You advise her to consider issuing stocks a common way of raising capital when a company gets listed. Using available information from a sample of firms which can be considered comparable to Bonnies business in the future. You estimate, explain and advise her on the following issues.

1. A comparable firm is about to pay dividend of $2 by the end of the year. This information is available to the market. Your forecast indicates that dividend of this company can increase by 4% in the next two years. After that, dividend will increase by 5% and 6% in the year 3 and 4 before revert to 2% per year indefinitely. Given the level of risk of this stock, you consider that it is appropriate to accept a rate of return of 4% per year. What should be the price of this stock?

If this stock is currently trading for $100 in the market, how would you advise Bonnie?

2. Bonnie appears hesitant to accept this level of risk. From her view, a level of risk should be lower. Without any calculation, what will happen to your initial valuation?

3. As the Bonnie is planning to list the company and raise equity capital for the expansion of business, you realized that they are concerned about achieving a higher price for their initial public offering. You believe that Bonnie should not focus on the current stock prices because doing so will lead to an overemphasis on short term profits at the expense of long term profits. Write a brief explanation (maximum 200 words) on how you would explain this to Bonnie and provide a justification for your argument.