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Delta Airlines Module 9: Valuation of equity

Delta Airlines Module 9: Valuation of equity. Laura Conti. Delta Airlines. Delta has 18.6% of the market share in the domestic airline industry Headquarters : Atlanta, Georgia Annual passengers: greater than 160 million. Assumptions. R E q = 11 % R D = 3.8% β= 1.16

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Delta Airlines Module 9: Valuation of equity

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  1. Delta AirlinesModule 9: Valuation of equity Laura Conti

  2. Delta Airlines • Delta has 18.6% of the market share in the domestic airline industry • Headquarters: Atlanta, Georgia • Annual passengers: greater than 160 million

  3. Assumptions • REq = 11% • RD = 3.8% • β= 1.16 • Market premium =5% • REnt= 8.3%

  4. Abnormal enterprise income growth • Agrt=(EPATt+ (rEnt*FCFt-1)-((1+ rEnt)*EPATt-1)) • Anchor on earnings instead of book value like REI • Anchor is capitalized earnings • Accounting changes do not change value estimate

  5. Growth in Residual Income • Using Solver: gresidualincome=8.79% • Long-term growth rate 2.50% • Value line recent price $30.92 Long-term Growth in Earnings/Sales • (1+gresidualincome) = (CIt+1-req*CSEt)/(CIt-req*CSEt-1) • Cit+1=$3.22 • 1+gincome=(3.22/3.67) • gincome= -12.48%

  6. Mid-year adjustment • Adjusting to mid-year to approximate payoffs occurring evenly throughout the year • X= 85,439 * (1+.083)^(3/12) • X= 87,159

  7. Sensitivity Analysis (Long-Term)

  8. Sensitivity Analysis (Short-Term)

  9. Sensitivity analysis • Both sensitivity analyses recommend to sell • No number on either sensitivity analysis brought the value down to the market value • Firm is overvalued

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