Calculating the Payout Ratio: How Investors Value Alibaba's IPO

[SK145]

Hi all! My question is as follows:


The Chinese e-commerce company Alibaba Group floated its share in the biggest IPO in US history. Alibaba Group priced its shares at 68 dollars raising 21.8 billion dollars and valuing the company at 167.6 billion dollars. The IPO prospectus notes that Alibaba does not plan to pay dividend in the foreseeable future and reported annual earnings of 3.52 dollars per share. Analysts estimate that the firm will grow at 25% per year for the next 5 years and at 5% after that. Currently, Return on Equity (ROE) is 25%. Investors agree that the appropriate discount rate is 10% and that in 5 years the firm will start distributing a dividend and will keep the payout ratio constant forever.

After a few days of trading, Alibaba's share price closes at 88 dollars. This trading price is the consensus valuation among investors and analysts.

What is the payout ratio after year 5 implied in the investors' valuation?

Here is what I have done so far:

Earnings per share, EPS = 3.52

Discount rate, r=0.1

Share price, P=68

Growth rate g=5% (After 5 years)

Using the formula P=Dividend/(r-g), I substitute in the values of g and P to find Dividend=3.40

Then, using the formula payout ratio = Dividend/EPS, I substitute in the values of Dividend and EPS to find the payout ratio=0.966

Am I on the right tracks here, or am I completely wrong? I wasn't sure about how to approach this question at all, so any help would be hugely appreciated! :)

 

[graceroberts531]

are you looking for the percent change on investment?

if so, price per unit share times number of shares. dollar price change times price change. divided by investment.

if you are looking for ROR or rate of return it is found by taking price, times price change. new price change divided by margin.

Also note the haircut should apply to the 88 not the 68. and would be equivalent to the math you use. so find 8% of 88. because if you wanted to use that stock as margin you could use the other 90%. at least I think that's how it goes anyway. Taken from chapter 1 of the series 3 commodities exam manual from Kaplan. it doesn't discuss dividends.

I would take a pic of the page, but it won't let me. you might also take advantage of the derivative calculator on the right of the page, under the MHB Widgets to solve this equation.
hope I didn't just confuse you more, but it was the only thing I could think of that might put you on the right track.