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FINC 614: Financial Markets
Table of Contents
1-What is an IPO and why is it such a big deal?...............................................2
IPO Definition:............................................................................................... 2
IPO Timing:.................................................................................................... 2
What is difference between Venture Capital and IPO :..................................2
IPO Steps:..................................................................................................... 3
Why to underprice?....................................................................................... 3
Why is it such a big deal?.............................................................................. 3
2. Is this a good idea? What are the advantages and disadvantages of going
public? Explain why you come to the conclusion that you come to public.......3
Is this a good idea?....................................................................................... 4
Advantage of IPO:......................................................................................... 4
Disadvantage of IPO :....................................................................................4
Explain why you come to the conclusion that you come to public:...............4
3. Why JetBlue Airways can still remain profitable while most airline
companies facing decline after 911 terrorist attacks?......................................5
Industry Analysis:.......................................................................................... 5
New entrants barrier.................................................................................... 5
Competitors:................................................................................................. 6
JetBlue Competitive advantage.....................................................................6
Conclusion:................................................................................................... 6
4. What different approaches can be used to value JetBlues shares?.............7
5. At what price would you recommend that JetBlue offer their shares? What
are the key drivers in the analysis?..................................................................8
The recommended share price:....................................................................8
The key drivers in the analysis:.....................................................................9
By doing so, a company goes from the status of private (no general
shareholders) to public (a firm with general shareholders).
After the IPO, when shares trade freely in the open market, money
passes between public investors.
IPO Timing:
A company can raise money by issuing either debt or equity. If the
company has never issued equity to the public, it's known as an IPO.
This is a very important source of funding for startups that do not have
access to capital markets.
It typically entails high risk for the investor, but it has the potential for aboveaverage returns.
IPO Steps:
Why to underprice?
IPO underpricing is the increase in stock value from the initial offering
price to the first-day closing price.
Underpriced IPOs may leave money on the table for corporations, but on
the other hand underpricing is unavoidable.
Underpricing signals high interest to the market which increases the
demand. On the other hand, overpriced stocks will drop long-term as the
price stabilizes so underpricing may keep the issuers safe from investor
litigation.
While going public can have many positive effects on a company and its
operations, these positive effects must be balanced against the disadvantages.
Going public drastically changes a companys culture and has an ongoing impact
on business operations.
Determining if going public is the right course for a company to pursue is a major
decision and must be carefully considered by management before this course is
taken.
Advantage of IPO:
Disadvantage of IPO :
Competitors:
JetBlue Direct Competitor
LUV = Southwest Airlines Co.
UAL = United Continental Holdings, Inc.
AAL = American Airlines Group Inc
3. High Value Geography They operate from six focus cities in some of
the largest travel markets in the United States. JetBlue plan to continue
to grow its network, with most of their flights touching at least one of
these focus cities.
Conclusion:
Because of the industry nature and the various completive advantages
JetBlue owns (especially low-fare strategy) they were able to remain
profitable after 11 September attack.
(Price/attribute) *
(attribute of the company) = value estimate of
the company
value we are trying to compute:
3. Also, look at the growth in EPS over the past several quarters / years to
understand how volatile EPS is
Where:
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
x=n p 1p 2p 3p 4
Share price =
5 2224252745
Direct Valuation:
By examination of firm financial statements, such as, cash flows, sales
and assets.
Price Revisions:
Cross-sectional regressions to be done on initial price adjustment and
underpricing in examining how the information on nonfinancial
fundamentals is incorporated into valuation at different IPO stages.
Long-term Performance:
long-term (three-year) examination of IPO performance.