Link to the case study is in the comments. In the custom Investments textbook, p

Question

Link to the case study is in the comments.

In the custom Investments textbook, page 577, read and perform an analysis of the case study. In your analysis address following questions:

1.What is an IPO and why is it such a big deal? Is this a good idea for JetBlue?

2.What do you think JetBlue stock is worth?

3.Does the financial forecast in Exhibit 13 seem reasonable? What are the key assumptions? Is the length of the forecast period reasonable?

4.What discount rate is appropriate for the cash flow forecast?

5.What was your approach for terminal value? How do your terminal value assumptions affect the estimated value of JetBlue shares?

6.What are the pros and cons of using a comparable multiple approaches in valuation?

Provide a case study report that presents your analysis and conclusions. Use Free Cash Flow valuation to estimate the value of JetBlue and its price per share. Be sure to use APA format and be sure to use citations and list references. Upload your report in word or pdf.

Explanation / Answer

An IPO is the first sale of stock by a private company to the public. IPO's are often issued by smaller, younger companies seeking the capital to expand but can also be done by large privately owned companies looking to become publicly traded.

JetBlue is under consideration to issue initial public offeringstherefore it is under consideration to evaluate IPO project and get the best from its offerings.

It is a big deal because it is the process not as easy as it looks like. In this firstrequirement is about the reporting requirements. Private companies are under consideration that they are not required to follow the reporting standard but for going through IPO the accounts must be reported in accordance with the acceptable accounting principles. In US its GAAPs are being followed. According to the SEC, if the company is under the process the. That company is required to present its audited accounts along with the extensive corporate governance requirements to be fulfilled. These requirements are not easy to file and has huge costs initially; as well as yearly. The other issue about the offer price, to get an offer price it must undergo an extensive calculation to derive an appropriate offer price.

Is IPO an good idea for jet blue?

The IPO process is not because the airline industry is going towards a growth after adecline, therefore stock price offer in current situation may not be so attractive. The real timing to issue IPO is the peak demand that is not in the current period. The company must wait for sometime and offer during the peak demand so that it can raise funds through other modes of financing like venture capital and debt financing.

Secondly, the IPO is generally underpriced and estimated that the company can get an offerprice of 80% of real valueof its shares. In the current situation, it is underpriced and its offer price is expected to be at 20% discount, therefore IPO may not be attractive in current situation.

Jet blue stock worth?

Jet blue could be one to watcclosely. Right now the company has Zack's rank#1 and it has been seeing rising earnings estimate revisions as of late.

In fact, the full year consensus estimate has risen from $1.92 per share to $ 1.93 / share is the past 30days, while three estimates have gone higher for the timeframe and zero have gone lower. JBLU has also style scores grades of A on both the value and growth fronts so it could be worth considering from that perspective too.

Financial forecast in exhibit 13

The estimates seems to be reasonable as thgrowth is expected in future years and the past tells that the companies revenues are expected to grow in future years there these assumptions are reasonable.

What are the key assumptions

It is assumed that growth in sales and free cash flows are expected to be breezed after 2010. In short the future values are expected to be same as on 2010.

Is the length of forecast period reasonable

The length of forecast is usually considered to be 1years. In this case, forecast is 8-9 years, therefore reasonable.

Discount rate for cash flow forecast

Thdiscounted cash flow analysis is about the company value through free cash flow valuation model that is considered to be the most appropriate valuation model. In this case, risk free rate is 5%, market risk premium is also 5% and beta equity of the company is 1.1

The cost of debt is given under the case 7.4%. But this can give a tax benefit therefore the net of the tax cost of debt is 4.9%.

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