Jetblue

Learning objectives 1. institutional aspects of integrity issuance dealings 2. costs and benefits associated with cosmos sh are offers 3. develop a deeper appreciation for challenges of valuing young regulars and enhance corporate valuation skills KEY QUESTIONS FOR CONISDERATION 1)What are the advantages and disadvantages of outlet cosmos? 2)What different approaches can be use of goods and servicesd to value JetBlues theatrical roles? 3)At what hurt would you recommend that JetBlue offer their shares? Potential Questions to be addressed in underwrite submission * What is an Initial Public Offering and why is it such a big deal? Is going state- avowed, particularly at the eon they did, a good idea for JetBlue? * What do you believe JetBlue armory is really deserving? * Does the financial forecast in representative Exhibit 13 calculate reasonable? * What are the key assumptions in the initial offering valuation? * Is the aloofness of the forecast period within the initial public offering valuation (exhibit 13) reasonable? * What give notice rate is al downhearted for for the silver flow forecast? * How would you suggest estimating the rod value? What assumptions have you made? How have your assumptions affected the estimated value of JetBlue shares? IntroductionAfter the terrorist attacks on kinsfolk 11, 2001, it was upset deeply because of the safety for the airline industry in the United States. The passenger demand suddenly reduced and m some(prenominal) flights turned afterwards, which led a lot of American airlines declared bankruptcy afterwards, including US Airways and United Airlines. It was a challenging time for airline industry, however, David Neeleman, the CEO and breach of JetBlue Airways, discovered an opportunity for the association. Barely two years after its foundation, the company decided to chevvy additional swell through initial public offering ( initial public offering).This report is aimed to apply financial t heories and concepts into analyse the real case study of JetBlue Airline. Firstly, the spurground of JetBlue entrust be introduced briefly. Also, the advantages and disadvantages of going public for JetBlue will be discussed in the following pages. In addition, the share valuation of JetBlue IPO will be estimated based on several assumptions. Last yet not least, the recommendation will be provided in the last noncurrent of this report. Background JetBlue was founded by David Neeleman in 1999, which looked to fulfil the purpose of humanity back to air travel.By following the low-cost model of southwestern United States Airlines, JetBlue pursued to offer passengers an enjoyable flying experience by providing in-flight entertainment, comfortable elbow room and high-quality customer service. In addition, in order to organise a sloshed and experienced working team, Neeleman employed several skilled senior managers, comprising of David Barger who was a former vice president of Con tinental Airlines to be president and murmur and John Owen who was executive vice president and former treasurer of Southwest Airlines to be CFO in JetBlue.Moreover, as the founder of JetBlue, Neeleman have profess extensive experience with airline start-ups from managing low-fare flights during university period. Based on the explicit selling strategy of JetBlue, barely less than one year, the company increased the routes to new(prenominal) cities in America and it continued to grow rapidly to 17 destinations in early 2002.And not alone that, JetBlue adopted the active measures to increase expenditures for warranter by setting up equip cockpits with bulletproof doors and security cameras, which intensify the confidence of US residences to take flights under the circumstance of few muckle was afraid of flying after September 11 hijackings. Advantages and disadvantages of going public Refer to Bodie, Kane and Marcus (2011), initial public offerings are stocks issued by a at o nce privately owned company that is going public, which means that selling stock to the public for the first time.According to Rothberg, the following table are shown some advantages and disadvantages of going public. Pros Cons Potentially large bonuses for business owners High explicit cost near 7% of the funds raised Ability to raise additional capital rapidly in the future Pressure to meet investor expectations Attraction and storage for the valuable talents Less control on make business decisions decisions should be based on the interest of shareholders and investors other than owners themselves Easy to sell self-control shares when owners exit business or retire Reporting disclosure on regular basis Access to capital markets In relation to this case, JetBlue aimed to raise additional capital through an IPO in order to support companys growth and offset portfolio losses by investors. Moreover, consort to John Owen, JetBlue had prepared the initial alteration statement wit h security and permutation commission (SEC) for the IPO on September 11, 2001. However, based on the September 11 attacks, they delayed IPO before it came into force. In fact, not only the terrorist attacks on September 11, 2001, but several impressions happened negatively affected the globose economy during the period of going public for JetBlue.For example, the contagion of bird flu was quite severe during taking flights, which definitely influenced the demand of flights. The increasing cover price also raised the basic cost in any transportation industry. Another negative condition could be the economic downturn, including split of the dot-com bubble and financial crisis in Asia. From this point of view, it seemed not to be an clutch time to going public. However, faced with the weak financial markets, JetBlue heedful the targeted strategies and made success in profitable operations.And IPO market is never assassinated for good company with real r nonethelessues and real earnings alone like JetBlue. It then turned out that it was a suitable time for JetBlue to IPO during the economic downturn though. JetBlues shares valuation There are various orders to value shares for a company, including free cash flow to equity (FCFE) method discounted by WACC, free cash flow to firm (FCFF) method discounted by cost of equity, dividend discount model and relative valuation techniques. Since JetBlue had not paid out any dividends on common stock, dividend discount model cannot be used to estimate company share value.In addition, FCFF method do not consider the effect of interest payment, however, as mentioned in the case, the federal Reserve had attempted to stimulate economic activity by decrease interest rates. Therefore, from my point of view, it was more appropriate to value JetBlue share by FCFE method to consider the consequences of interest rate. The assumptions are made for evaluate JetBlue share value as follows. The long-run growth rate was expect ed to be 7% annually. And the company would have survived and would be a typical firm with an estimated cost of equity of 15% in 2010.Last but not least, the appropriate discount rate was assumed to be 30%. Additionally, there was a quite weird number disappeared in the Exhibit 13, which was the expected pompousness rate was 4 times in 2002 than other years. After changing it back to the normal, the share value then could be calculated to be around $24. 60 per share. ( addendum 1) Recommendation Based on the assumptions, the calculated consequence is identical to the initial offering prices which ranged from initial price to implemented offering price ($24 to $25).Faced with sizable excess demand to potential investors, JetBlue took the appropriate measure to increase share value in order to repress money leave on the table. In the long run, I believe that JetBlue will still grow at a perpetual stage as the innovative spirit and seasonable measures to the different types of even ts. Therefore, JetBlues stock was worth for the potential and incoming investors. We prepared to retristrict initial registration with SEC for the IPO on September 11, 2001. Based on the event of that morning, we didnot .We waited until stock market settled down. We returned the profitability in November and December. We started to issue IPO gain in Christmas time. Obviously, we modified the document a bit. High growth, low cost profitable airline has rebounded substantially in the market place. It was a very good stands to do the IPO for JetBlue. Even though it was 2002, the IPO market was pretty much dead, the IPO market is never dead for good company with real revenues and real earnings. So we were confident even a small amount of John Owen registration statement with underwritersFCFF we do not consider the effect of interest payment 1) In FCFF, we use EBIT (1-t) whereas in FCFE, we use Net Income this is because while using EBIT (1-t) in FCFF we do not consider the effect of in terest payment as mentioned above. 2) IN FCFE, we use Change in Non- Cash Working upper-case letter*(1-D) jacket crown expenditure*(1-D) whereas in FCFF we use Change in Non-Cash Working Capital Capital Expenditure this is because we just want to concentrate on cash flow due to equity only. Reference Bodie Z. , Kane, A. , & Marcus, A. J. (2011).Investments (9th ed. ). New York McGraw-Hill Rothberg F. The Pros and Cons of deprivation Public. Retrieved from http//www. cfoedge. com/resources/articles/cfo-edge-the-pros-and-cons-of-going-public. pdf Appendix (Appendix 1 Share valuation of JetBlue Airways) 1 . Bodie Z. , Kane, A. , & Marcus, A. J. (2011). Investments (9th ed. ). New York McGraw-Hill 2 . Rothberg F. The Pros and Cons of Going Public. Retrieved from http//www. cfoedge. com/resources/articles/cfo-edge-the-pros-and-cons-of-going-public. pdf