Using Real Options Approach For The Timing And Pricing Problems Of Alibaba’s IPO

Alibaba Group was successfully listed in New York Stock Exchange (NYSE) on Sep 19,2014. The fundraising was total $25.03 billion at $68 per share. It set the largest IPO record in the history of American stock market. To a pre-IPO enterprise, there is no doubt that it is very important for the timing and pricing of IPO. It is directly related to whether the enterprise can be successfully listed and affects the future development of enterprise.It is studied in this paper by utilizing real options approach for the timing and pricing problems of Alibaba Group’s IPO. The main contents are arranged as below:Chapter One is the section of introduction. It mainly introduces the studied issues and goals, and reviews the literatures relevant to this paper which including the overseas and domestic research statuses. Meanwhile, the research direction of this paper is clear that:Using real options approach to research the timing and pricing problems of Alibaba Group’s IPO.In Chapter Two, the real options theory is discussed. The internal logic of real options is discovered through the comparison between the real options theory and traditional method of investment decision. It is also introduced for the four basic models and solution of real options, namely that:Partial Differential Equation Method, Dynamic Programming Method, Solution of Backward Stochastic Differential Equations and Monte Carlo Simulation.Chapter Three introduces the real options model which is used to study the timing of IPO. Firstly, the basic assumption is proposed on the basis of existing literatures. It is established for the optimal stochastic model of IPO, and the IPO critical value of enterprise is worked out. Meanwhile, it is briefly described for the changing situation of this value following the variation of parameters. All of these provides a theoretical foreshadowing for the research on the timing of IPO of Alibaba Group in Chapter Five.Chapter Four introduces the real options model which is used to study the pricing problem of IPO, namely as:Schwartz-Moon Continuous Real Option Model. This model is applied to analyze the value of internet companies. In Chapter Four, it is analyzed for the assumptions and solving process of model. It is discussed how to discretize the model so that the Monte Carlo Simulation could be used to solve. Furthermore, it is described for the acquisition method of parameters values inside the model. They offer a theoretical foreshadowing for the research on IPO pricing problem of Alibaba Group in Chapter Five.In Chapter Five, it is studied for IPO’s timing and pricing problems of Alibaba Group. First, it is introduced for the company profile and IPO course of Alibaba Group. The timing of IPO of Alibaba Group is analyzed by using the real options model of Chapter Three. It is obtained for the critical value of cash flow on IPO of Alibaba Group. Through the comparison with the current cash flow situation of Alibaba Group, it is gotten for the conclusion that Alibaba Group could carry through IPO. Furthermore, the IPO of Alibaba Group is priced by using the real options model in Chapter Four, and the sensitivity analysis on key variables is carried through. In the end, it is revealed for the key factors which influencing the company values.Chapter Six is to sum up the conclusions of this analysis.