You learned that Brussels Cafes, a company owning and operating four extremely successful restaurants in Milwaukee, is doing an Initial Public Offering (IPO), next month. They are offering their stock at $22 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 for the next 5 years. You expect the before-tax cash flow, which the firm would immediately pay out to shareholders, to be $500K in each of the next five years, and in years 6 the firms cash flow would be $525K. Starting year 6, that cash flow would continue in perpetuity, growing by 5% per year. 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 10% per year, (2) the tax on dividend distributions you pay is 15%, and (3) the number of fully diluted shares outstanding of the company is 250,000? Would you buy the stock at the IPO?

ANSWER: Maximum price per share: _____________________

What would you do? __________________________________________________