Jetblue airways ipo valuation excel

BNFN 4304 – Financial Policy

Mr. Masood Aijazi

Case 45: JETBLUE AIRWAYS IPO VALUATION

Macintosh HD:Users:maryam:Desktop:1200px-JetBlue_Airways_Logo.png

Spring Semester 2017 – 2018

Done By

Maryam Barifah 1420023

Nour Abdulaziz 1420149

Balquis Mekhlafi 1420231

Shrouq Al-Jaaidi 1420072

Submission Date

24/04/2018

Guidance Sheet

This case examines the April 2002 decision of JetBlue management to price the initial public offering of JetBlue stock during one of the worst periods in airline history. The case outlines JetBlue’s innovative strategy and the associated strong financial performance over its initial two years. Students are invited to value the stock and take a position on whether the current $25–$26 per share filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. The epilogue details the 67% first-day rise in JetBlue stock from the $27 offer price. With such a backdrop, students are exposed to one of the well-known finance anomalies—the IPO underpricing phenomenon—and are invited to critically discuss various proposed explanations.

The case has the following learning objectives:

· Review the institutional aspects of the equity issuance transaction.

· Explore the costs and benefits associated with public share offerings.

· Develop an appreciation for the challenges of valuing unseasoned firms.

· Hone corporate valuation skills, particularly using market multiples.

· Evaluate the received explanations of various finance anomalies, such as the IPO underpricing phenomenon.

Introduction

JetBlue airways has been operating successfully since its inception in the year 2000. The airways company offers safety, simplicity, high craft utilization and low-fare. The company is also well-known for offering its passengers pleasant, reasonable and convenient point-to-point air travel with some special facilities. The company relied mainly on word of mouth advertising to implement its strategy. After two years of aggressive operations in 2002 and operating 24 aircrafts flying 108 flights each day to 17 destinations. The management saw it most fit to raise additional capital through the launch of public equity offering. The company’s management were preparing the requirements of the SEC to sort out the details of the offering.

This case examines JetBlue management’s decision in 2002 to price the initial public offering of the airways stock during one of the worst periods in airline history. Shedding light on JetBlue’s innovative strategy and the associated strong financial performance over its initial two years. This is done through valuing the stock and taking a position on whether the current $25–$26 per share filing range is appropriate, and helping to make a recommendation according to the results.

1. What are the advantages and disadvantages of going public? Why is it such a big deal? Is this a good idea for JetBlue?

An initial public offering (IPO) is the first stock sale a company offers to the public, says NASDAQ. IPOs are usually issued by startup companies or small companies that are seeking equity capital and a public market. Since startups are exteremly risky, investors who purchase IPOs are usually prepared for accepting large gains for high risk. Raising additional capital was required for JetBlue to sustain the company’s growth.

Advantages of Going Public

Entrance to capital markets. Going public exposes the company to financing sources while lowering the cost of c§apital, providing by that the necessary resources to further help the company grow and increase its competitiveness through adding assets to the financial statements, and improving the marketing plans.

Increased liquidity. Going public allows the company’s investors to sell a percentage of their sales once the IPOs are issued. It also provides investors to increase their shares through market offerings and through sharing the risks with new shares while taking in advantage the projected increase in a company’s value.

Improved credibility with stakeholders. Going public offers the company a positive impact on its stakeholders through the implementation of better managerial practices, and through obtaining better ability to recruit better incentivized employees. Furthermore, the positive impact spreads to customers and investors through highlighting the vision, values, principles and financial strengths the company has as a means of satisfying the quality standards for some customers, as well as be transparent; proving the company’s high morale.

Disadvantages of Going Public

Public scrutiny exposure. With the public exposure that the company will face once it publishes its statements, this exposes the management to governmental and public scrutiny. The company would be subject to unexpected auditing and SEC visits. They would also have to publish annual reports of their finances. This pressures investors to achieve good results and yields yearly.

The disclosure of information. As companies issue IPOs, they would be going public. This means that all of their consolidated financial statements are available for the public to use. A more severe disadvantage is that competitors could use these statements to gain leverage and to plot their success around the public company’s financial statement.