Discounted Cash Flow approach Two-step From year 2010 to infinity From year 2002-2010 WACC
OCF=NOPAT + Depreciation
Changes in Net WC=Ending Net WC-
Beginning Net WC
Total cash of the firm=OCF-CAPEX-Changes
in Net WC
Then, we get those numbers:
Question: how to determine “g”?
Choice one: choose reasonable “g”
Negative or irrational “g” Impossible!
Choice two: project relative stable “g”
after year 2010
Assumptions to be made:
Then, let us forecast…
Finally, we decide g=6.5%
WACC Pioneer model in low-fare air travel that needs to be followed The most stable one in historical annual growth of low-fare airlines (see Exhibit 8) Like JetBlue, they all belong to low-fare airlines that compare to other groups (see Exhibit 12) Idea: Why choose Southwest?
WACC-9.91% Weights Re Rd Equity: 16,071.99 Debt: 1,842 E/(E+D)=0.9 D/(E+D)=0.1 Rf : 5% Rm-Rf : 5% Beta: 1.10 CAPM: 10.5% Weighted average of cost :6.91% Tax rate:34% Rd : 4.561%
Finally, we get those numbers:
Value of the firm=2,630,100,000
Price per share = $57.1
Comment: from this point, even the target
price at $25 or $26 is still conservative.
Higher price is achievable.
Multiples comparables approach
Trailing vs. Leading?
All airlines vs. one group?
Southwest in particular or not?
Low-fare US Airlines Low-fare Foreign Airlines Big 5 Low-fare Regional Airlines Level Of Relevance
My Choice: leading+ one group+ Southwest (why?)
Numbers are in thousands
(Median and Mean) (From Southwest )
Conclusion $24.8 (from Southwest ) $15.1 (from Mean) $24.1 (from Median) $57.1 (from DCF approach) Increase the Price to $28!