Jetblue Ipo
JetBlue IPO
WACC
The estimation of cost of capital for JetBlue proved to be a difficult process. Considering the company has an unfavorable capital structure, due to the fact that they are acquiring a large number of aircrafts, simply taking the weights of debt and equity are not acceptable. In order to accurately judge the discount rate the multiples method is necessary. The comparison was to a leading low-fare airline company, Southwest. Another critical point is that taking the book values as compared to the market values is not an accurate depiction of what the market is willing to pay. There are several components that came into play with calculating the WACC. Necessary components included: weights of debt and equity, cost of debt and equity, and the tax rate.
Cost of Debt
Determining the cost of debt is generally an easy process. Since JetBlue is not a public company at the moment that this case is taking place, their issuance of debt is not readily available. A fair judgment would be Southwest’s cost of debt in this case. To calculate that, we simply took the average yield-to-maturity for Southwest’s outstanding bonds (see Exhibit 6). Cost of debt was 6.91%
Cost of Equity
In order to calculate the cost of equity in this particular situation the CAPM model was the best choice. The risk-free rate and the market risk premium were given in the case. Both numbers were five percent. Beta can be somewhat difficult to calculate, especially for a firm that is not publicly held. For estimating this value we can once again use the multiples method to come to a fair estimation. Since using the multiples with JetBlue proves to be more challenging than necessary, an industry average can be applied. Professor Damoradan has a great set of data to choose from based on industry, and that is where we found the value of 0.82. All of these values put together into the formula of the risk-free rate plus beta multiplied by the market risk premium
WACC
The estimation of cost of capital for JetBlue proved to be a difficult process. Considering the company has an unfavorable capital structure, due to the fact that they are acquiring a large number of aircrafts, simply taking the weights of debt and equity are not acceptable. In order to accurately judge the discount rate the multiples method is necessary. The comparison was to a leading low-fare airline company, Southwest. Another critical point is that taking the book values as compared to the market values is not an accurate depiction of what the market is willing to pay. There are several components that came into play with calculating the WACC. Necessary components included: weights of debt and equity, cost of debt and equity, and the tax rate.
Cost of Debt
Determining the cost of debt is generally an easy process. Since JetBlue is not a public company at the moment that this case is taking place, their issuance of debt is not readily available. A fair judgment would be Southwest’s cost of debt in this case. To calculate that, we simply took the average yield-to-maturity for Southwest’s outstanding bonds (see Exhibit 6). Cost of debt was 6.91%
Cost of Equity
In order to calculate the cost of equity in this particular situation the CAPM model was the best choice. The risk-free rate and the market risk premium were given in the case. Both numbers were five percent. Beta can be somewhat difficult to calculate, especially for a firm that is not publicly held. For estimating this value we can once again use the multiples method to come to a fair estimation. Since using the multiples with JetBlue proves to be more challenging than necessary, an industry average can be applied. Professor Damoradan has a great set of data to choose from based on industry, and that is where we found the value of 0.82. All of these values put together into the formula of the risk-free rate plus beta multiplied by the market risk premium