Hand in Problem Set 1

Fin-Tech, a finance and technology firm, floated its shares today. The IPO prospectus notes that Fin-Tech does not plan to pay any dividend in the foreseeable future and reported annual earnings of $4 per share (this is the earning as of today). Fin-Techs Return on Equity is 15% and expected to stay the same forever. Investors agree that the appropriate discount rate is 10% and that in 4 years the firm will start distributing a dividend keeping the payout ratio constant after that.

Fin-Techs share price closed at $52.56. This trading price is the consensus valuation among investors and analysts.

1. What is the payout ratio on and after year 4 implied by investors valuation?
2. What is the implied PVGO?