DBM310: Corporate Financial Management

Graduate School of Business

University of St. La Salle Bacolod City October 5, 2019

Baylosis, Michael V.
Gustilo, Dante Jr. D.

CASE 6: JET BLUE STOCK VALUATION

1. What are the advantages and disadvantages of going public?

> Advantages of going public includes, but not limited to: (a) Raise short-term capital and provide access to future capital; (b) Company publicity and establishes credibility; (c) Lastly, it
reduces overall cost of capital.
> Disadvantages of going public includes, but not limited to: (a) Potential loss of control; (b) Market pressure; (c) Transaction Costs

2. What different approaches can be used to value JetBlue’s shares?

> Valuation of Stocks can be done using the following method: (a) Zero-growth Model; (b) Constant-growth Model; (c) Variable-growth model; and (d) Discounted free cash flow.
However, Since the case provides information that dividends are not distributed by JetBlue, then the use of discounted free cash flow method of valuation is used (for computation, please refer to
Table 1). Also, since additional information are provided in the case, other stock valuation methods can be done using information about Multiple/ multipliers. The methods we used includes:
Price/ Earning Multiple. We used the Weighted Average Cost of Capital (WACC) as the discounting rate. Valuation using P/E Multiple method is presented in table 2 while WACC computation
is presented in table 3.
3. At what price would you recommend that JetBlue offer its shares?
> The recommended price the JetBlue offer its shares would range between P28.48 to P29.83

Supporting Computations:
Table 1. Stock Valuation using Discounted Free Cash Flow Method

WACC 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011 to infinity

1 2 3 4 5 6 7 8 9 10 TOTALS

NOPAT 53 89 120 149 181 215 247 270 292

Depreciation 18 26 36 45 54 65 75 83 90

Capital 290 328 345 310 326 342 299 157 132 2240
expenditure

Net working capital 34 63 94 126 157 191 227 261 285 308
(NWC)

Change in NWC 29 31 32 31 34 36 34 24 23

Free Cash Flows -248 -244 -221 -147 -125 -98 -11 172 227 4523

Present Value 9.22% ₱227.06 ₱204.54 ₱169.62 ₱103.30 ₱80.43 ₱57.73 ₱5.93 -₱84.94 -₱102.64 -₱1,872.26 -₱1,211.22

₱1,211.22 We will not apply the formula used in Gitman because the discount rate used was the WACC, which already considers the cost of preferred stock and cost of debt.

Debt 301.38 As a result the amount computed above is already the value of equity. (see slide 46)

Preferred shares 210.44

Cash and cash 117.52

equivalents

Value of equity ₱1,211.22

Common equity 40.6 35.1 + 5.5

Share price ₱29.83

Table 2. Stock Valuation using Price/Earning Multiple Valuation Method

Share price Earnings per share PE Multiple Share price Earnings per share PE Multiple
(EPS) (EPS)

TRAILING LEADING

AirTran 7.59 0.30 25.30 8.64 0.30 20.00

Frontier 16.80 2.00 8.40 11.51 0.40 45.90

Midwest 23.03 0.80 17.40

Ryanair 30.80 0.70 44.00 25.91 0.90 34.10

Southwest 19.32 0.70 27.60 20.15 0.70 28.40

WestJet 15.68 0.80 19.60 17.27 0.60 26.90

Average 24.98 28.78

JetBlue 28.48 1.14 37.57 1.31

53 (2002E NOPAT)
divided by 40.6