Present value of growth opportunities

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Reference no: EM13885171

One year ago, the Chinese e-commerce company Alibaba Group floated its shares in the biggest Initial Public Offering in US history. Alibaba Group priced its shares at $68 raising $21.8 bn and valuing the company at $167.6 bn. The IPO prospectus notes that Alibaba does not plan to pay dividend in the foreseeable future and reported annual earnings of $3.52 per share.

Currently, the Return on Equity is 25% but it is expected to decrease to 12.5% after year 3. Investors agree that the appropriate discount rate is 10% and that in 4 years the firm will start distributing a dividend and will keep the payout ratio constant forever.

After one year of trading, Alibaba’s share price closes at $50.73. This trading price is the consensus valuation among investors and analysts.

a. What is the payout ratio on and after year 4 implied in the investors’ valuation?

b. What is the implied PVGO (Present Value of Growth Opportunities)?

Reference no: EM13885171

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