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JetBlue Airways IPO Valuation Case Solution & Answer

JetBlue Airways IPO Valuation

The IPO and the Owners

The IPO decision is a very crucial decision for the owners especially because it represents the success of the owners which includes their higher level of hard work to make the company public. Every implication of these process are directly referred to the work of owners and they are the ones who get the benefits out of this process. Hence during the IPO process the owners have to very careful about any decision to be made because it’s about their hard work getting paid through this process and they want to take only right steps.

Objectives

This analysis aims to identify the per share price of the company on the basis of DCF approach for the company’s IPO and evaluation of the company’s equity and its value. Moreover the analysis also aims at evaluating the company’s offered price, whether it is suitable or not.

Assumptions

  • The estimation of D/E ratio is based on total Capital Multiple.
  • The 28.3 pc of the total assets is supposed to be long term liability and 18.5 pc to be preferred stock. Whereas our assumptions are based on total capital multiple.
  • And the remaining 53.2 pc would consists of equity/asset ratio.
  • The risk and market premium is used according to April 2002.
  • 34 pc for corporate tax.
  • The terminal growth rate is used at 5 pc because of the 4pc inflation rate, it is supposed that the company’s growth would be sustained greater than inflation rate.
  • For the 30-year cash flows, number of planes in fleet after the year 2010 have been incorporated while the forecasts of the number of plane in the fleet have been estimated based on the five year moving averaged method.
  • NOPAT estimations are also based on five year moving averages.
  • The capital expenditure includes cost per incremental aircraft which has been increased about 4% in accordance with inflation rate also the sustainable growth is assumed to be more than that.
  • Based on the analysis of competitors’ growth rate and their declining trend, its ultimate effects are also used and represented I cash flow estimations of the company.
  • From the analysis of company’s 9-year data, the share price of the company has been identified as shown in exhibit 13.
  • To determine the WACC of the company the levered beta of the comparable company have been used which is used to determine the unlevered beta and then after using company debt/equity ratio its levered beta is determined.

Interpreting calculations

On the basis of data provided in the case, the 30 years projections of the company have been made to determine its share price. Based on 8.95 pc WACC and 5pc annual growth rate the terminal value is determined tobe 6821 dollars with total cash flows of 3045 dollars. On that basis, the total enterprise is 9866 dollars. For the calculations of equity the 210 million dollars of preferred stock from the company’s balance sheet and 301 million dollars of long –term debt is deducted.

Note: refer to the excel attachment.

The WACC estimations is based on total capital of the competitors. After taking their total capitals average the company’s debt/equity is determined by using the formula as shown in exhibit 2 in the report.

The 9238 million dollars of equity is divided by 40.5 million of outstanding shares and the 227.5 dollars per share price is determined.

The per share price for the IPO of the company is based on the PE valuation approach, using the market average levered to the earnings per share the 42 dollars per share price is calculated, it is higher price as compared to the competitors.

Based on the calculated cash flows of the case the determined share price of 225 dollars is not normal because of them fact that the cash flows were estimated for about thirty years and this much long period makes the calculations from FCF approach irrelevant because of many factors and constraints included an arising in the mention duration. Hence the 25 dollars per share price should be preferred because of greater success ratio and brad name allocated to it.

Underpricing

Underpricing referred to the company offering IPO at price lower than the market value. The underpricing is temporarily done to create more demand of the company’s stock. The high demand would ultimately turn the prices to its intrinsic value which is based on the company’s 30 years cash flow estimations i.e. 227.5 dollars per share, however the offered price for IPO is suggested in the range of 25 to 26 dollars, lower than its intrinsic value.

Sensitivity analysis

The sensitivity analysis is done to identify the impact of various values of independent variable i.e. the WACC and the terminal rate, upon the value of dependent variable i.e. share price of the company. The results of the sensitivity analysis is as follows.

In this table the independent variables that are WACC and terminal growth rates have been increased by 0.5. Based on the analysis it could be depicted that the WACC has indirect relationship with the share price, increasing WACC tends to decrease the share price. Whereas the terminal growth rate has direct relationship with per share price, it implies that the increasing terminal rate tend to increase it.

Advantages of IPO

The advantages of the IPO are that the company could raise sufficient capital out of it and that capital could be used by the company for its future growth and also the company could pay off it liabilities from this additional capital. Besides that the company could also use this capital for its capital expenditures related to various future investments. Also the additional benefit of IPO includes that through the IPO the awareness about the company is increased in the market as well as among the public.

Disadvantages of IPO

The foremost disadvantage of the IPO is that the owners have to compromise on their ownership because their equity in the company is decreased with enabling new investors to invest in the company’s stake through IPO. Other than this the IPO process are usually very complexed and \time consuming. The owners would have to add a lot if efforts in the process, it is because the company have to show its very good image to catch good number of investors. Moreover the owners would have to share the profits with the shareholders.

Expansion

With the process of IPO the company gets a lot of benefits. Firstly, it is able to generate acknowledgment about its success and growth among the public. Secondly because of this the company could generate sufficient capital for future investments and for company’s growth and expansion. Hence it could be said that the IPOs are always a best decision for the company’s growth and its name….

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