Reference no: EM132440643

Problem: You are an associate at Bank IB. You are assisting in the initial public offering (IPO) of PayPal. Your task is to determine the price that IB should sell PayPal's shares at using the dividend discount model.

• PayPal's IPO will occur at t=0, at which time PayPal will have no liabilities.

• Initially, at t=0,1, and 2, PayPal is in a high growth phase and does not pay dividends.
• In three years, at t=3, PayPal will pay a $50 per share dividend. Then in four years, at t=4, PayPay will pay a dividend of $75 per share.
• PayPal will enter a steady growth phase in year 5 (t=5). In this steady growth phase PayPal will pay a dividend of $100 per share at t=5 and thereafter dividends will grow at a steady rate of 9% per year, forever; for example, the dividend in year 6, at t=6, would be $100(1+9%)=$109.
• PayPal's discount rate is 21%.

Question 1: What is the PV today at t=0 of the dividends paid in PayPal's growth phase from t=0 up to and including t=4?

Question 2: What is the PV at t=4 of the dividends paid during PayPal's steady growth phase; i.e., what is the terminal value?

Question 3: What is the PV at t=0 of the dividends paid during PayPal's steady growth phase?

Question 4: At what price should PayPal's stock be sold for at t=0?