JetBlue Airways IPO Valuation Case Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

JetBlue Airways IPO Valuation Case Study Help

Valuation of JetBlue’s enterprise using the DCF method

Using the financial data provided in the case, and the consideration for long term growth prospects, the cash flows of the company are estimated using the data provided in the case i.e. exhibit 13. To calculate the share price with the use ofa discounted cash flow method (DCF), the WACC is calculated with the information provided in the case. The cost of equity is calculated to be 10.70% while the cost of debt after tax is 7.86%, hence resulted in a 10.422% weighted average cost of capital. The calculation can be seen in Appendix A.

Using the DCF method, the cash flows of the company are negative until the year 2008, after then, the cash flows are positive or greater than 1. The terminal value of the company amounts to $4399.660148 which is then discount back with the cost of capital. The discounted terminal value of the company amounts to $1990.535418 whereas the net present value or enterprise value is $1,268.22. The equity value is calculated after deducting debt and adding cash & cash equivalent in enterprise value. The share price is calculated by the total share outstanding by the enterprise value. Using the DCF method, the price of the share is near to management’s offering price range i.e. $25 to $26. The calculation using the DCF method can be seen in Appendix B.

The exit multiple approachesare used tocalculate the enterprise value and ultimately share price, the price of the share is calculated to be $190.50 which is considerably higher than estimated by the management of the company. It is because the investorswon’t buy shares at a higher price. The share price using the discounted cash flow method and exit multiple methods is $28.80 and 190.50 respectively. The calculations are provided in Appendix C.

Valuation of JetBlue’s enterprise using Comparable firm’s Data

The share price of the company is calculated using the low fair industry segment. As JetBlue isvaluable and low cost airlines, the data of the low cost US airlines are used to estimate the share price of the company. The share price of a company is calculated using the price earning valuation technique which is based on the average share price of the comparable firms is calculated to be $42.64 per share. The price is significantly higher than the estimated share price of between $25 and $26, which shows that the company should offer shares to investors at the price below $42.64 to attract them and to raise the desired amount of funds. In addition to this, the low cost carrier Southwest Airline is used to calculate the share price of the IPO. The share price of the company is calculated to be $272.55 which is considerably higher than the estimated share price. The calculation of the JetBlue’s enterprise using comparable firm data is provided in Appendix D.

IPO Timing and Price Point Appropriate for Jetblue

From the quantitative standpoint, the price of the share calculated using DiscountedCash Flow method is appropriate due to the fact that the DCF method is forward looking approach & it highly depends on the future projection rather than the historical values. Additionally, the DCF Method is focused on generating cash flows as well as less affected by the policies of accounting(Edleson, 2019).The recommended price of a share is $28.81 which is calculated using the DCF method. It is because the price estimated by the management of the company i.e. $25 to $26 leaves too much money on the table. So, the company should offer its investors a share at the price of $28.8 as it would send a strong signal of confidence to them &the entire market.

Additionally, the management of the company should ensure that the investor hasthe best interest of the business. Also, the management of the company should build and maintain strong and positive relations with potential investors and meet their expectations. It is recommended that the company should continue on its strategy of organic growth, and invest in services and products so to offer value proposition and an outstanding experience to customer, it should become more receptive to partnership, it should target the untapped markets as well to enjoy the first mover advantage, it should also capitalize strategic alliances and invest in R&D to innovate. In doing so, the investors would most likely invest in the company through purchasing shares......................................

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