DATE: September, 27 2013
RE: One-Page Memo on JetBlue Case Study
The purpose of this memorandum is to discuss the JetBlue case study, and review my answers to the specified questions. I will elaborate as to which price I believe JetBlue should choose for their initial public offering (IPO), and why JetBlue should choose that price.
The first step in determining JetBlue’s IPO price is analyzing specific ratios of publicly traded competitors in JetBlue’s industry. I analyzed the Price-to-Earnings multiples, Cash Flow multiples, Total Assets multiples, and the Revenue multiples of the direct competitors of JetBlue. JetBlue’s direct competitors ...view middle of the document...
I decided to remove MidWest’s negative multiples, which were irrelevant, and to average the remaining multiples together to form an IPO price for JetBlue of $24.57.
JetBlue Airways Case #28
1. What are the advantages and disadvantages to a firm from going public? List at least three of each.
• Capital is raised.
• Increased public awareness.
• Potential exit strategy for founders.
• Must meet SEC rules and regulations.
• Added pressure from the market to meet short-term expectations.
• Increased costs from financial statement reporting, auditing, investor relations department, and accounting oversight committees.
2. Using the data in Exhibit 7 on the back of this sheet, answer the following questions, showing all calculations. (Note: Express all multiples and all prices to two decimal places.)
a. What are JetBlue’s five implied market prices based upon the P/E multiples of the five comparable airlines listed in Exhibit 7? (Use JetBlue’s diluted EPS value from Exhibit 3 for the year 2001.)
Alaska Air: $47.23
American West: $29.04
MidWest: -$15.60 but is irrelevant because the multiple was negative.
b. What are JetBlue’s five implied market prices based upon the CF (cash flow) multiples listed in Exhibit 7 for the five comparable airlines? Use the 2001 cash flow from Exhibit 3, and the number of outstanding shares immediately after the IPO, as given in Exhibit 1.
Alaska Air: $27.64
American West: $30.82
MidWest: -$11.42 but is irrelevant because the multiple was negative.
c. What are JetBlue’s five implied market prices based upon the TA (total assets) multiples? Use the total assets figure from JetBlue’s 2001 balance sheet, and the number of outstanding shares immediately after its IPO.
Alaska Air: $30.69
American West: $26.24
d. What are JetBlue’s implied market prices based upon the Revenue multiples? Use JetBlue’s 2001 “operating revenues” from Exhibit 3, and the number of outstanding shares immediately after its IPO.
Alaska Air: $8.92