Discounted Cash Flow Analysis One of the methods that can be used to valuate a company is the discounted cash

flow analysis method, which takes projected cash flows and discounts them at a derived discount rate. In this case a discount rate of 8.88% was used. To find this rate we used the information given in the case to find the cost of equity. A risk free rate of 5% was given as well as a MRP of 5%, a beta was given for Southwest Airlines of 1.10, which is what we used since it was the best comparable company in the case and no other information that could be used to derive a beta for Jet Blue was given in the case. Plugging these numbers into CAPM gave us a cost of equity of 10.50%. The cost of debt was estimated by using Exhibit 6 and taking an average of the cost of Southwest Airlines outstanding debt and then deducting 34% for taxes. The cost of debt came out to be 4.56%. The cost of preferred stock was 8.06%, which was a result of dividing the preferred stock dividends by the preferred stock outstanding. To find the WACC or the discount rate we used the book values for long term debt and deferred credits & other liabilities, and for convertible redeemable preferred stock. Since the company had negative equity, and the case lacked information regarding any debt/equity ratios, we used an estimated equity value under the assumption that the outstanding 35.1 million shares would be worth around $26 each, and this is the value we used for the weight of equity in finding wacc. Using Exhibit 13 we arrived at Jet Blues free cash flows through 2010 and then we discounted it at a rate of 8.88% and arrived at an NPV of -663 million. We then applied a 4% stable growth rate into perpetuity to find the terminal value at the end of 2010, which was 4,838 million. Adding the two we arrived at a firm value of $1,586 million, we then subtracted the debt and preferred stock to find the value of equity, which was 1,075 million. This number was then divided by the number of shares that would be outstanding after the IPO, which was 40.6 million, and this gave us a value of $26.48 per share.