Jetblue Ipo

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outstanding from Southwest airlines, it is 6.91%. The table 2 has illustrated the assumptions of each input and WACC has achieved as 9.279%.

Based on the forecast from exhibit 13 and WACC achieved above, it comes to the valuation of free cash flow of firm and free cash flow of equity. As the expected inflation rate is 4% to 5%. And in U.S survey, the expected inflation rate in 2002 was about 2% to 4%. So, the perpetuity growth rate used 4% to reflect the expected inflation rate and the real interest rate in 2002.

All the assumption above gave the estimate IPO share price was $24.043. The terminal value assumed of perpetuity growth rate. The lower the growth rate gave lower estimated share price as it explained in the table below. Because the lower perpetuity growth rate would generate lower terminal value thus affect free cash flow of firm then the share price.

Current low-fare airlines competitors included AirTran, America West, ATA, Frontier, and Alaska Air and non-U. S carriers Ryanair, WestJet and EasyJet. Apart from the DCF valuation method, it could use relative market comparable to evaluate companies. As the result of share price should be positive, so the selected data would be all positive. Then the five companies’ multiple would be used to evaluate JetBlue as following table shown. There were five different multiples in exhibit 7, because the book value of equity in balance sheet appeared to be negative, therefore the select multiples were EBITDA multiples, EBIT multiples and PE multiple. Relative valuation should be used to complement DCF analysis. However, the IPO share price range should fall between $3 and $29 in trailing period and between $11 and $99 in leading period. The results have covered big price range. As different companies were at their own stage of business such as Southwest has long history while Ryanair was new entrant in airline industry. PE ratio is affected by growth of dividends and required rate of return on its equity. As JetBlue did not mention future dividend plan and has not offered any dividend to current common stockholders. So, PE multiple valuation may not be accurate. Another concern is that Ryanair and WestJet are non-U. S airline companies then they may apply to different account standard and tax rate, therefore the results are only proxy and less accurate. Thus, multiple valuation would only give a price range proxy and IPO share price should be within the price range. The more accurate would be mainly relied on fundamental analysis.

Recommended IPO share price

As most group expected huge demand of JetBlue stock, the IPO plan was to increase the price range to between $25 and $26. Based on all the assumption and analysis above, it recommended the price should more than $24 to reflect the current free cash to potential equity shareholders and market value of JetBlue. And JetBlue should consider increasing the price range up as it said in the case up to $26. The reasons are as following. First, the demand is unpredictable and affected by price offer. As if required price is too high, it may be compromised IPO. Second, the offer price should not be too conservative. As current market condition is that investors have recover from the 911 event. The exhibit 11 has shown that airline industry was affect from the hit but quickly recover to remain as same as before 911 happened. Third, airline industry is still growing but with a few more new entries so the revenue will expect to grow but the margin may not be optimist as it expected as severe competition and world oil price increased the expense. But on the other hand, investors just suffered stock market crash cause by 911. They need good investment opportunities and both financial data and operating strategy have delivered the messages to investors that JetBlue has potential growth ability which could bring them higher required rate of return compared to others. JetBlue has remained profit and increased market share through 911 period.

In the reality, JetBlue had IPO on 12 April 2002 at price of $27 and issued 5,866,667 shares on the exchange stock market. And the IPO soared 67% and closed at $45 on the first day. Also, it was the biggest gain in Nasdaq at that time and it implied JetBlue has chosen a great time to deliver its IPO.