Case 28 Jetblue Airways Ipo Valuation

Case 28 JetBlue Airways IPO Valuation

JetBlue is a popular airline who uses a cost leadership strategy and it has been rapidly increasing its popularity. The firm thought it was time to raise capital in order to finance their growth. JetBlue was planning to go public in 2002 and was having trouble deciding what its stock price should be. Our goal in this case was to come up with an appropriate price for JetBlue stock. Currently, the initial price range for JetBlue shares communicated to potential investors was between $22 and $24. There were 5.5 million shares planned for the IPO and demand was currently exceeding supply. Management decided to increase the price range to be somewhere between $25 to $26. We chose to use the free cash flows method in order to find an appropriate stock price. We assumed growth rate on free cash flows was going to be around 5.4%. This number was derived from looking at the projected cash flows. The WACC in this case was 9.86%. We used a beta of 1.3 to calculate return on equity. This number was chosen because it represents the risk of the firm versus and established firm such as Southwest. Southwest has a WACC of 1.1 but we did not use this number because this firm is already established and thus is less risky than JetBlue. Value of debt includes short term borrowings, current maturities of long term debt, and long term debt; together they totaled about $370,000. Value of preferred is $210,441 and represents convertible redeemable preferred stock. Based on our calculations, we came up with a stock price of $45.02 per share. This is about $20 above the price originally communicated to investors. We believe JetBlue stock is in high demand based on some of the quotes by analysts and reporters. We do not want to leave a lot of money in the table and want to make sure to get the most money possible out of the IPO. $45 seems like the right price because it is not too high or too low.