You learned that Brussels Cafes, a company owning and operating four extremely successful restaurants in Milwaukee, is doing an IPO, or Initial Public Offering, next month. They are offering their stock at $42 per share. You are interested in pricing their shares, in order to identify whether you should buy any. The firm has no debt, just equity capital. Since you often visit their restaurants, you made some predictions about their annual cash flow. You expect the after-tax net cash flow to be $600K in each of the next five years. The firm will pay out 80% of the capital immediately to shareholders, and re-invest the rest into property, plant, and equipment, or net working capital. After year 5, that cash flow would continue in perpetuity, growing by 5% per year, with growth starting in year 6. What do you think the true value of the stock is, assuming,

(1) you believe the appropriate cost of equity capital for the firm is 15% per year,

(2) the number of fully diluted shares outstanding is 150,000?

What is the value of the stock to you?

Would you buy the stock at the IPO?

Why?