A technology firm floated its shares today with an initial public offering (IPO). The prospectus for the IPO notes that the firm plans to continue its zero payout policy (no dividends) in the near future and reported annual earnings of £8 per share (these are the earnings as of today). The firm has a return on equity (ROE) of 12% per year, which is expected to stay the same forever. It is investors common belief that the appropriate discount rate is 10% per year and that in 4 years time the firm will start distributing a dividend keeping the payout ratio constant after that. The firm’s closing share price today is £118.22. This trading price is the consensus valuation among investors and analysts.1. What is the payout ratio in year 4 and beyond implied by investors’ valuation of the share price today?
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