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Module 6: Cost of Capital and Valuation Regional Airlines - jetBlue. Michelle Kelly. Three Different Cost of Capitals. Cost of Enterprise Capital Risk associated with enterprise operations Not affected by changing from debt to equity financing Difficult to Measure Cost of Debt

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Module 6 cost of capital and valuation regional airlines jetblue

Module 6: Cost of Capital and ValuationRegional Airlines - jetBlue

Michelle Kelly


Three different cost of capitals
Three Different Cost of Capitals

  • Cost of Enterprise Capital

    • Risk associated with enterprise operations

    • Not affected by changing from debt to equity financing

    • Difficult to Measure

  • Cost of Debt

    • Risk of Default

    • Affected by changes in the amount of debt outstanding and maturity dates

  • Cost of Equity

    • Risk to Shareholders of receiving distributions

    • Affected by changes in the amount of debt outstanding and shifting maturity dates

    • Affected by changes in enterprise value

  • None are observable but all can be calculated


  • Relationship between costs of capital
    Relationship Between Costs of Capital

    • Equity is not inherently risk

      • Risk associated comes from enterprise operations and defaulting on debt

      • Proper way to calculate cost of equity would be to subtract cost of debt from cost of enterprise capital

      • However, enterprise capital is difficult to calculate so often add cost of debt and equity to find it



    Determining beta other sources
    Determining Beta- Other Sources

    • www. google.com 1.24

    • www.nasdaq.com 1.44

    • http://investing.money.msn.com 1.24

    • http://www.reuters.com 1.02

    • http://finance.yahoo.com 0.55

    • http://research.scottrade.com 1.00

    • http://research.tdameritrade.com 1.00

    • http://www.firstrade.com 0.55

    • http://finance.comcast.net 1.02

    • http://www.zacks.com 1.24

    • http://www3.valueline.com 1.25

    • http://data.cnbc.com 1.02




    Determining beta
    Determining Beta (1/1/09-2/3/2014)

    • Beta: 1.24

      • Supported by Regression Analysis

      • Supported by other analyst estimates

      • Higher than Bloomberg Beta but middle ground for other beta estimates


    Cost of equity capital
    Cost of Equity Capital (1/1/09-2/3/2014)

    • Based on the Capital Asset Pricing Model

    • Jet Blue Cost of Equity:

      • -.3835% +1.24 (8.5%) = 10.16%

      • 8.5% is the average monthly return on the S&P 500 for the last five years


    Cost of debt capital debt rating
    Cost of Debt Capital: Debt Rating (1/1/09-2/3/2014)

    • Moody’s

      • B3

    • S&P

      • B

    • Fitch

      • B

    • All highly speculative ratings which are associated with debt which has a high risk of default


    Cost of debt capital
    Cost of Debt Capital (1/1/09-2/3/2014)

    • Annual RNFL

    • Average: 3.9%


    Cost of debt capital alternative
    Cost of Debt Capital - Alternative (1/1/09-2/3/2014)

    • Interest expense/Average amount of interest-bearing debt

      • Multiply by 1- tax rate in order to get after tax cost

    • Jet Blue:

      • Interest Expense 2012: $176

      • Average amount of debt: $997.5

        • (2012:$950 and 2011: $1045):

      • Effective tax rate is 39%

      • $176/997.5 x(1-.39) = 10.76%


    Cost of debt capital1
    Cost of Debt Capital (1/1/09-2/3/2014)

    • Large variation between the two cost of debts calculated

    • Pros and Cons to both

      • RNFL seems low based on the low rating of JetBlue’s debt by credit agencies

      • Alternative is too high because it does not have adjustments for other forms of debt such as capitalized leases

    • Use RNFL


    Cost of enterprise capital
    Cost of Enterprise Capital (1/1/09-2/3/2014)

    • VD = $2,360 million (projected 2013 book value of NFL)

    • VEq = $2,386 million (stock price of $8.50 at February 11, 2014 times 280.750 million common shares outstanding)

    • Implied VEnt = $4,746 million ($2,360 + $2,368)

  • 3.9% (2,360/4,746) + 10.16%(2,386/4,746)

    WACC = 7%


  • Bloomberg wacc
    Bloomberg WACC (1/1/09-2/3/2014)


    Valuing jet blue
    Valuing Jet Blue (1/1/09-2/3/2014)

    • EATO:1.28

    • EPM 4.46%

    • Assumed Sales Revenue Growth: 5%

    • Assumed Discount Rate:  7%


    Questions
    Questions? (1/1/09-2/3/2014)


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