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Jetblue Question Case 26

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JETBLUE AIRWAYS IPO VALUATION

Teaching Note

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 percent 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 provides opportunities for the instructor to develop any of the following teaching 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.

Study Questions

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

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

3. At what price would you recommend that JetBlue offer their shares?

Supplementary Material

Although the context of the discussion is mergers, the Darden technical note “Methods of Valuation for Mergers and Acquisitions” (UVA-F-1274) reviews the mechanics of firm valuation using...

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