One year ago, the Chinese e-commerce company Alibaba Group floated its shares in the biggest Initial Public

Question:

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)?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...