Cash Flow and Growth Rate
Week 8 Case Study – JetBlue Man Hon Chan 22002960
Introduction
An initial public offering (IPO) refers to the initial stage of shares offering to the public market for subscriptions by a company to raise capital for the purpose of expansion. It is considered as a big issue for companies as an IPO does not necessary guarantee the success of a company as it is merely a tool of raising capital while its costs of issuance and consecutive monitoring costs (due to diluted shareholdings of the company by public investors) are relatively higher than the cost of issuing corporate debt. Yet IPO is still a popular tool for infant firms due to the fact it creates strategic market exposure. JetBlue was attempting to issue an IPO in 2002 after the subsequent event of 9/11 terrorist attack. This report attempts to calculate and evaluate the IPO valuation of JetBlue’s stocks and provide recommendation and adjustments where necessary to reflect the true value of JetBlue.
Assumptions made in Exhibit 13
There were several valuation techniques used by analysts and underwriters to value an enterprise’s share, they are respectively the Discounted Cash Flow Method (DCF) for instance, Free Cash Flow to Equity (FCFE), Free Cash Flow to Firm (FCFF), and Dividend Discount Model, and the Relative Valuation Techniques, for instance Price Earnings Ratio (P/E) and Price Book Value Ratio (P/BV). Dividend Discount Model requires input of next year’s expected dividend distributed, a required rate of return by shareholders and an estimation of growth rate. Since JetBlue does not pay out dividend before listed (despite dividend distributed to preferred shares shareholders), such model is considered as inapplicable. The FCFE and FCFF method were developed for firms which does not distribute dividend and their valuation is based on the free cash flow available to the equity holders or to the firm, and thus calculate the share price of a firm after attributing outstanding shares. The
Introduction
An initial public offering (IPO) refers to the initial stage of shares offering to the public market for subscriptions by a company to raise capital for the purpose of expansion. It is considered as a big issue for companies as an IPO does not necessary guarantee the success of a company as it is merely a tool of raising capital while its costs of issuance and consecutive monitoring costs (due to diluted shareholdings of the company by public investors) are relatively higher than the cost of issuing corporate debt. Yet IPO is still a popular tool for infant firms due to the fact it creates strategic market exposure. JetBlue was attempting to issue an IPO in 2002 after the subsequent event of 9/11 terrorist attack. This report attempts to calculate and evaluate the IPO valuation of JetBlue’s stocks and provide recommendation and adjustments where necessary to reflect the true value of JetBlue.
Assumptions made in Exhibit 13
There were several valuation techniques used by analysts and underwriters to value an enterprise’s share, they are respectively the Discounted Cash Flow Method (DCF) for instance, Free Cash Flow to Equity (FCFE), Free Cash Flow to Firm (FCFF), and Dividend Discount Model, and the Relative Valuation Techniques, for instance Price Earnings Ratio (P/E) and Price Book Value Ratio (P/BV). Dividend Discount Model requires input of next year’s expected dividend distributed, a required rate of return by shareholders and an estimation of growth rate. Since JetBlue does not pay out dividend before listed (despite dividend distributed to preferred shares shareholders), such model is considered as inapplicable. The FCFE and FCFF method were developed for firms which does not distribute dividend and their valuation is based on the free cash flow available to the equity holders or to the firm, and thus calculate the share price of a firm after attributing outstanding shares. The