Tom : Implied Growth Valuation Model Harvard Case Solution & Analysis




Subject: Implied Growth Valuation Model

From the given material in the case, the concern was raised on the following:

Different valuations were adopted to evaluate the companies operating in the Internet business. The evaluations were made to analyze which model is best for the Internet companies. After calculative analysis of both the valuation models, Implied Growth valuation model and discounted cash flow model; a conclusion was made that the Implied Growth valuation model was best for the evaluation of Internet organizations.

The Implied Average Annual Growth Rate Approach

An essential valuation driver is growth or expected growth, which is done on the basis of sales and profits. That is what the Perkins wished to examine under “The Internet Bubble.” Based on some assumptions of projected profitability, the Perkins attempts to assess the growth rates of Internet organizations for proceeding five years, which is the period with hyper growth that is suggested in the current prices. The Perkins made two sets of assumption, the first assumption was made for the future execution of Internet organizations and the second assumption was made for required rate of return. Exhibit Implied Growth in Excel shows the calculation with assumptions.

The Perkins expected that current investors will require 15% to 25% for every penny of return for their venture. The following assumptions are made for calculation of Implied Growth Rate:


Risk free rate and market risk premium were assumed to be 6% with beta of 1.8 taken for years 2000 to 2004 and beta of 0.5 was taken for years 2005 to 2009. At HKD 1.63 for a share, the IPO would give Tom a market capitalization of HKD 4.6 billion. To understand this sort of return, the market capitalization of Tom in five years would need to be HKD 5.34 billion to HKD 5.8 billion. The Perkins likewise accepted that in three years, average P/E multiple of Internet organizations would be 40 times, net revenue would be 5% to 15% and rate of dilution would be 5%. Based upon the Perkins' suppositions, the average income of Tom in three years would be HKD 9.3 billion to HKD 7.4 billion. This reflected a normal income development of 100% to 208% the following three years from HKD 51.7 million in 1999.

Despite the fact that such growth numbers may turn psyche boggling when observed for the first time, however; they are less aggravating when contrasted with intimated development rates that were figured by the Perkins and focused around information as of June 11, 1999 of companion Internet organizations in the United States (see Exhibit 6 of the case). The case showed that as per IDC, Internet client growth rate in Asia in the three years was somewhere around 1998 and 2003 and was anticipated to be 40%. In addition, e-trade growth rate in Asia would be 104, which arrived at US$118.4 billion in 2003....................

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