Xing Liang Huang

AF495
12/05/2015
JetBlue IPO Valuation
1. What are the advantages and disadvantages of going public?
An Initial Public Offering (IPO) is the first sales of stock by a company to the
public. The most obviously advantage of going to public is to generate an additional
capital for an accelerate growth. Another advantage is an increased of market potential,
when the company goes public, it becomes easier to market their products or services.
IPO will increase company profile in the industry and its brand awareness; it will also
attract more business and retain quality personnel with stock option.
Although there are many benefits to goes public, there are also some reasons a
company doesnt want to goes public. One of the reasons is the cost. These costs include
legal and accounting fees, SEC fees, underwriters expense allowance, S-1 registration
fees, trans agent and other cost. Also, if the offering does not go through, the company
will lose the money for nothing. Another disadvantage is the outside investors can
influence companys discussion because they have the right to vote in shareholders
meeting, unless the owner or management retained a large percentage of corporate stock,
if not he/she may loss control of its decision making ability. The company will be under
pressure to maintain a good public image and to meet investors expectation. The
management team should understand when the company goes public, the company is no
longer a private company, and they are not only serving to someone or themselves but
serve to the public investors.

2. What different approaches can be used to value JetBlues shares?

Discounted Cash Flow Method, and Dividend growth model are the most commonly
used approaches to valuing a company or project. In this case, JetBlue management
claim not to pay any dividends on their stock, I would recommend to use DCF evaluates
the stock price for JetBlue, because it is the most efficient model.
3. At what price would you recommend that JetBlue offer its share?
DCF uses weighted average cost of capital (WACC) to discounted future free cash
flow to find a present value of a company or project. Free cash flow is a measurement of
companys financial performance, it represents the cash that is available for the company
and it is calculated as NOPAT+DEP-Chang in Net Working Capital-CAPEX. The
discounted cash flow model is calculated as follows:
DCF = CF1 / (1+r)1 + CF2 / (1+r)2 CFn / (1+r)n
Since required information was not available in the case for JetBlue, I
decided to use the information from a comparable company,
Southwest Airlines, to calculate WACC.
Calculation as:
Total Market value of equity
776.8*20.69=16072 (in millions)
Total common shares outstanding 776.8 (in millions) multiply by recent
stock price if $20.69, and give the total market value of equity of
16072 millions. Information find in Exhibit 5.

Total market value of debt

474+200+614+52+100+100+100+100+109=1850
Total market value of debt find by sum up all current debt outstand in
Exhibit 6 and give the total number of 1850 millions.
Total market value of debt & equity
16072+1850=17922
Total market value of debt & equity found by Total market value of debt
add Total market value of equity
Weight of equity
16072/17922=89.68%
Weight of equity found by Total market value of equity divides by Total
market value of debt & equity
Weight of Debt
1850/17922=10.32%
Weight of debt found by Total market value of debt divides by Total
market value of debt & equity
Cost of equity, (Require rate of return)
(1.1*5%)+5%=10.5%
Southwest s beta, 1.1 in Exhibit #5 multiply by market risk premium of
5% and add 5% yield of long term US treasuries trade, both
information provide in text, pg186, and give a require rate of return of
10.5%.
Cost of debt
Cost of debt 8.68% found in Exhibit 6.

WACC
89.68%*10.5%+10.32%*8.68%=10.31%
Weight of equity multiply by cost of equity add weight of debt multiply
by cost of debt and give a WACC equal 10.31%
Free Cash Flow
Finding cash flows began with NOPAT, which was provided in Exhibit 13
of the case. The Change in NWC is calculated by current years NWC
minus previous years NWC. The present value of each cash flow was
received by discounting the value using the weighted average cost of
capital of 10.31%. The total of all of the cash flows is then divided by
the total number of shares to be outstanding after the issue to arrive at
the recommended offering price of $20.66. A chart illustrating the
calculation is provided below.
Recommendation:
According to the calculation, I recommend JetBlues initial public
offering price range should stay with $22-24.