Jetblue Ipo Case

Assumption:

1. We decided to use Southwest's data as a reference to calculate WACC is because compare to other low fare airplane companies in the industry, Southwest is a dominant player and also has similar business structure with JetBlue.

2. We assume JetBlue and Southwest have same leverage, so we can use Southwest Levered bets as JetBlue equity beta

3. We us Southwest Yield to Maturity of Southwest 5 year debt issued as the cost of debt capital for JetBlue

4. Base on Exhibit 5, we conclude that Southwest has a stable tax rate at 38.5%.

5. We use Fisher formula to determine the stable growth rate, 1+g=(1+ greal)(1+ ginflation) g=greal+ ginflation.

6. Nominal GDP growth rate is 4.3%, which is the total of real GDP growth rate (3.0%) and the inflation rate (1.3%), according to the official forecasts from the Trading Economics).

7. We assume stable GDP growth rate is 6% for JetBlue, since JetBlue is a new startup company with a promising growth rate.

Footnote

OCF = NOPAT + Depreciation

NOPAT = EBIT -Taxes

NCS = Capital Expenditure

∆NWC = Ending NWC - Beginning NWC

Cash Flow from assets = Operating Cash Flow (OCF) - Net Capiral Spending (NCS) - Changes in NWC (∆NWC)

Market Value of Equity = Common Shares Outstanding * Recent Stock Price (exhibit 5)

Enterprise Value = Market Value Equity + Book Value Debt

Re=Rf+Beta*(Rm-Rf)

WACC=Wd*Rd*(1-Tc)+We*Re

Terminal Value (T) = Cash Flow (T+1) / (R-g)

Present Valueof cash flow

= t=1TCF1+Rt+TVT1+RT

Present Valueof cash flow

= t=1TCF1+Rt+TVT1+RT

Present Value of Equity = PV of cash flow- Total Debt

Share Price = Present Value of Equity / Number of shares outstanding