Case 1- JetBlue Airways IPO Valuation
- Jing Zhang ( 23913134 )
A company issue stocks to generial public at its first time on a security exchange is call Initial Public Offering( IPO ). Initial Public Offering enable a company to raise capital from the public rather than private investors or institutions. IPO is considered as such a big deal for a company mainly because the company become a public corporation and have to be monitored by general pubic after IPO. Going public has bought about a considerable numbers of benefits. For instant, IPO increse the liquidity of capital and enable cheaper access to open market. Furthermore, going public enhance ...view middle of the document...
Thus, the firm had been profitable and growed rapidly. In order to maintain rapid growth rate, setting up an IPO is a reasonable option to raise addtional capital.
There are two main ways to estimate the value of firm. One is absolute valuation method which including free cash flow to equity method( FCFE ) and free cash flow to firm method( FCFF ). Another one is relative valuation method which uses relative valuation techniques such as price earing ratio( P/E) and EBITDA multiple. In this case, FCFF has been used to estimate the value of the firm.
In this case, the financial data from Southwset Airlines has been used to estimate the weighted average cost of capital( WACC ) of JetBlue Airways. This mainly becasue Southwset Airlines belongs to low-fare airlines just as JetBlue Airways, and it has the longest history and grows stably compare to other companies.
Furthermore, the length of the forecast period within the IPO valuation( Exhibit 13) is not reasonable because it ignored the situation after 2010. In this case, average growth rate of expected inflation rate from 2002 to 2011( Exhibit 13) is used to estimate the growth rate.
| Exhibit 13- Estimate Grow rate | |
|Issue |Weight of Bond |Yield to Maturity |Weight Yield |
|8.75 Note |25% |5.65% |1.41% |
|8.00 Note |25% |5.91% |1.48% |
|7.875 Debenture |25% |7.41% |1.85% |
|7.375 Debenture |25% |8.68% |2.17% |
| | | |6.91% |
Since the tax rate is 34%, the cost of debt after tax should be 6.91% *(1-38.5%) = 4.25%