Acct

JetBlue Airways can use many approaches to determine the proper price for its IPO. There are two methods we used mostly, first is Discounted Cash Flow Analysis, and the other is using valuation multiples.

1. DCF Analysis

In this case, when we estimate their price for IPO, at first we should use their income statement, which is Exhibit 13, to calculate their cash flow. The results are in Exhibit 1.1. However, we find that the growth rate of cash flow is almost negative and changes a lot; it is not suitable for us to use this growth rate to estimate their infinite cash flow. So we estimate JetBlue’s cash flow after year of 2010, and before this, we should make some assumptions:

(1) Depreciation is increased by 8 million every year which is from the average increase from previous years;

(2) NOPAT is increased by 25 million every year;

(3) Capital expenditure is about 110 million every year, and there is a decreasing trend from previous years;

(4) The change in Net Working Capital is 30 units every year, which is the average change from previous year.

According above assumptions and data in Table 1, we can forecast the cash flow after year 2010, and the results are in Exhibit 1.2. From the exhibit, we can get that the growth rate of cash flow is close to 6% year by year. So we assume that the year of constant growth begins in 2020, and the constant growth rate is 6.54%, which is taken by the average of year 2019 and 2020.

And secondly, we should calculate the cost of capital to discount the cash flow. The best approach is the weighted average cost of capital (WACC), but before we must compute both the cost of debt and cost of equity and their weight. For capital structure, we use the data from Exhibit 5. The reasons we use Southwest Airline are that, first of all, the pioneer model in low-fare air travel needs to be followed; secondly, it is the most stable one in historical annual growth of low-fare airlines from Exhibit 8; and furthermore,...