JetBlue Airlines, a low-fare commercial airline, has planned to go public towards the end of 2001. During the process the firm had restructured their initial price from $22- 24 per share to $26 – 28 per share.
Advantages / Disadvantages of the IPO Decision
There are considerable advantages with obtaining equity through the IPO process. There are, however, some drawbacks that also need to be taken into consideration. Some of the advantages and disadvantages are: Advantages
* Equity value is established for the firm * Current shareholders can diversify personal portfolios
| * SEC requires public disclosure of financial information (transparency) * IPO expenses
| * Liquidity of stock increases
| * Owner restricted to immediate cash-out
| * Easier to raise capital in the future
| * Sharing of future earnings with outsiders
| * Legal liability
Exhibit A in the appendix outlines some additional key advantages and disadvantages of going public through the IPO process.
IPO Valuation Techniques
Deriving a value for an IPO is the critical part of the process. In both fixed price and book building offers some form of initial price must be determined by the investment bank. Key methods are used to determine the value of a company and thus the initial IPO price includes: * Discounting Methods: based on a firms intrinsic value (future cash flows) * Comparable Multiples Method: value based on similar publicly traded companies Using information from the case we perceived the IPO pricing of $24-26 was determined by using the comparable multiples approach. Therefore, we will use the discounted cash flows method to determine an introductory price and evaluate whether it is in-line with the current proposed price. Exhibit B provides a description of each method.
Discounted Cash Flow
It is our recommendation for the firm to set the price range for the IPO at the adjusted rate of $26 to...
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