JetBlue Airways IPO Valuation
Essay Preview: JetBlue Airways IPO Valuation
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This case examines the April 2002, decision of JetBlue management to price the initial public offering of JetBlue stock during one of the worst periods in airline history. The case outlines JetBlues innovative strategy and the associated strong financial performance over its initial two years. The task is to value the stock and take a position on whether the current $25 ± $26 per share filing range is appropriate.
The Corporate Value Model (By Discounted Cash Flow Method)
FCF = NOPAT+ Depreciation – CAP EXP – NWC
Terminal Value = FCF Steady State / (WACC – g ) = V company at t=n
Terminal Value = FCF / (WACC – g ) = V company at t=n
V=D+E
Offering Price = $25.59 (worksheet below)
Summary of WACC Calculation for JetBlue Airways and Worksheet
Pretax cost of debt
7.41%
Kd =Yield to maturity of Southwest Airlines debenture (Exhibit 6)
Tax rate
After-tax cost of debt
4.89%
Kd (1-t)
169,700
Preferred stock dividends was $16,970 thousands ( Exhibit 3)
210,441,000
Convertible redeemable preferred stock ( Exhibit 2)
Cost of pref stock
8.06%
Kp =Dp / Pp
Equity beta
Refer Beta of Southwest Airlines was (Exhibit 5)
5.00%
Current long-term U.S. Treasuries traded at a yield of 5%
10.00%
Rm =Rf +R
RM-Rf
5.00%
Market risk premium is 5%
Cost of common stock
10.50%
Ke = Rf +F*(Rm-Rf)
Weight of debt
17.6%
Debt = 301,373 (Book value, Long term debt, Exhibit 2)
Weight of pref stock
12.3%
Preferred stock= 210,441 (Book value, Exhibit 2)
Weight of com stock
70.1%
Common stock= 1,198,049 (App. Market =46,078,829*$26)
9.21%
WACC = Kd (1-t)* Wd + Kp*Wp + Ke* We
Assumption / Estimation
Steady-state growth
7.00%
Operating margin
15.20%
Discount rate (WACC)
9.21%
Tax Rate
Inflation Rate (prices and costs)
$ figures in millions
Actual Estimate
Number of aircraft
$ Revenue/plane
$15.30
$17.60
$18.40
$19.20
$20.10
$21.00
$21.90
$22.80
$23.80
$24.90
Expected inflation
Operating margin
8.40%
13.30%
15.20%
15.20%
15.20%
15.20%
15.20%
15.20%
15.20%
15.20%
$ Depreciation/plane
$0.50
$0.50
$0.50
$0.60
$0.60
$0.60
$0.70
$0.70
$0.70
$0.80
$ CapEx/New planes
$21.30
$22.30
$23.50
$24.60
$25.90
$27.10
$28.50
$29.90
$31.40
$33.00
Expected inflation
NWC Turnover
Financial forecast
Revenue
$1,192
$1,485
$1,802
$2,144
$2,466
$2,694
$2,912
$3,116