2. 2
Table of Contents
Company Description……………………………………………………….3-5
Intrinsic Value Analysis…………………………………………………….6-14
Multiple Analysis – Method of Comparables……………………………………...6
Asset-Based Valuation……………………………………………………………..7
Dividend Discount Model………………………………………………………….7-9
DCF Model…………………………………………………………………………9-11
RE Model…………………………………………………………………………..11-12
AEG Model...............................................................................................................12-14
Important FinancialRatios………………………………………………....15
Conclusion……………………………………………………………………16-17
References…………………………………………………………………….18-19
Appendix……………………………………………………………………...20-25
3. 3
1. CompanyDescription
In 1928, C.E. Woolman, purchased a commercial aviation company named Huff Daland
Dusters and renamed the firm to Delta Air Service for the Mississippi Delta region it served.
Huff Daland Dusters was the first commercial agricultural flying company in existence at its’
founding in 1924 and prior to its acquisition, Huff Daland had extended its services to Peru and
operated the first international mail and passenger route on the West Coast of South America. In
1945 the official corporate name became Delta Air Lines, Inc. and was recognized by the
National Safety Council for more than 300 million passenger miles and 10 years of flight without
a passenger or crew fatality. By 1955, Delta began the use of the “hub-system” which brought
passengers to airports to connect with other flights. Six years later in 1961, Delta flew the first
non-stop route from Atlanta to Los Angeles. By 1970, Delta had upgraded all of its planes to an
all jet fleet. The early 1970’s-1980’s brought upon countless mergers and expansion of Delta Air
Lines. In 1991, Delta purchased all of Pan America’s trans-Atlantic routes, making it the largest
acquisition in airline history, which made Delta a global carrier. In 2010, Delta announced the
largest product upgrade in the last ten years with plans to invest more than $2 billion through
fiscal year 2013 to improve the customer experience by installing new full-flat beds in wide body
aircraft, adding more and improving first class cabins, renovating Delta Sky Clubs and adding
more first class seats on domestic flights.
Today, C.E. Woolman’s company now has annual profits of over one billion dollars,
operates more than 700 aircraft of all sizes, has also expanded into a refinery operation to hedge
against rising fuel costs and is recognized as one of the top airline companies on the globe. Delta
is incorporated under the laws of the State of Delaware and is headquartered at the Hartsfield-
Jackson Atlanta International Airport in Atlanta, Georgia.
4. 4
Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo
throughout the United States and around the world. Delta operates through two different
segments: Airline and Refinery. The airline segment not only provides scheduled air
transportation for passengers and cargo, but also ancillary airline services, including maintenance
and repair services for third parties as well. Delta’s network is based on a system of hub and
international airports that they operate in Amsterdam, Atlanta, Detroit, Los Angeles,
Minneapolis, New York-LaGuardia and JFK, Paris, Salt-Lake City, Seattle, and Tokyo. In order
to expand into international markets, Delta has entered into several international alliances with
“SkyTeam”, which has allowed the firm to, “link its network with the route networks of the other
member airlines providing increased connecting traffic while offering enhanced customer service
through reciprocal codesharing and frequent flyer arrangements and airport lounge access
programs and coordinated cargo operations.”
Delta operates in a very competitive market. Delta’s main competitors are: American
Airlines, United Continental, Southwest Airlines, JetBlue Airways, Alaska Air Group, Malaysia
Airline System, SkyWest, Hawaiian Holdings, and Spirit Airlines. Compared to the competitors
listed above, Delta ranks second, behind American Airlines, in terms of sales (Millions) and
employee size with United Continental and Southwest ranking third and fourth respectively.
Delta Air Lines fleet of aircraft is one of the largest in the world. As of December 31,
2014 Delta’s fleet was composed of 587 aircraft that are owned, 87 were classified as capital
leased, and 98 were classified as an operating lease. In such a client-centric business
environment, firms like Delta must constantly upgrade technologies in order to keep a
competitive edge. Because of this, Delta has purchase commitments on new aircraft over the next
few years. Delta has promised to buy 25 new aircraft in 2015, 38 in 2016, and 42 in 2017.
5. 5
Delta’s largest operating expense each year is the cost of jet fuel. Due to jet fuel prices
constantly rising, ($3.25 in 2012, $3.00 in 2013, and $3.47 in 2014) Delta’s wholly owned
subsidiary, Monroe Energy, LLC in fiscal year 2012, acquired the Trainer refinery operation and
related assets outside of Philadelphia, Pennsylvania to hedge against rising fuel prices. Monroe
invested $180 million to acquire this refinery from Phillips 66 and received a $30 million dollar
grant from the state of Pennsylvania. Prior to this acquisition, Phillips 66 had closed the refinery.
The trainer refinery can produce roughly 185,000 barrels of crude oil per day. However, the
refinery only produces non jet-fuel products (gas, diesel, and other refined products). Under a
multi-year agreement, Monroe, LLC exchanges the non-jet fuel products to Phillips 66 for jet
fuel to be used in the airline operation of Delta. Even with refinery operations in full swing,
Delta posted a $2.0 billion loss under their fuel-hedging program in 2014, a gain of $493 million
in 2013, and a $66 million loss in 2012.
Delta’s Book Value Per Share has very peculiar growth rates. There is a significant
increase in BV P/S in 2014, compared to 2013. In fiscal year 2013, Delta’s Board of Directors
initiated a quarterly dividend program and declared a $0.06 per share dividend for shareholders
of record as of August 9, 2013 and November 6, 2013. Dividends were paid in September and
November respectively.
6. 6
2. Intrinsic ValueAnalysis
a. Multiple Analysis- Method of Comparables
For the Method of Comparables, we originally used three of Delta’s competitors that
FactSet had provided us, which were American Airlines, United Continental, and Lufthansa.
However, our group decided to switch out Lufthansa out for a domestic competitor because
Lufthansa would be an outlier when it came to gathering data, due to their lack of being directly
affected by domestic economic factors. In figure 1A below, you can see where we substituted in
Southwest Airlines Co., with already existing comparable companies American Airlines and
United Airlines, and came across the most accurate ratio comparison.
Method of Comparables
[A1]
However, even when finding the best three comparable companies for Delta, the large
difference in their price to sales, price to equity and price to book ratios, led to a projected stock
price for Delta of $75.80 [A2], which was $25 over the current price ($50.58)[A3]. This
overvaluation of Delta’s stock using the Comparable Method largely stems from such varying
P/S, P/E, and P/B ratios for the all competitors. We believe this stock price is overvalued and
inaccurate, and would not recommend this model- this being our con for the Method of
7. 7
Comparables. Our pro for the model would be the easy accessibility of which it required to find
each of the numbers for the calculation of the model.
b. Asset BasedValuation
We did not calculate the value of our company using the Asset-Based valuation method
because at its core the airline industry is a service industry. Delta certainly has very high value
assets composed of their fleet of jets and the fuel they need to fly those jets, but Delta is not an
“asset-based” company. It would be very difficult to identify company value outside of what is
already on the balance sheet, which would give us a projected price much lower than the actual
price. We could attempt to determine the market value of Delta’s investments, amortized assets,
and intangible assets, but our projected price would certainly be missing elements and would
include very general value estimations. It would be fairly easy to determine the market value of
Delta’s tangible assets and investments, but since Delta is a service industry a lot of value would
be lost in the price calculation using the asset-based valuation method, therefore we cannot use
this model.
c. Dividend Discount Model
Through FactSet, we found that Delta does pay dividends, but it hasn’t been paying them
for long (only since 2013). The dividends are growing, but at an extremely high rate (almost 50%
a year). This is understandable though, as this is an indication that Delta is attempting to draw in
new investors with these high dividend growth rates. However, it means for us we have to try
and figure out a reasonable growth rate for the future, as there is no way Delta can sustain a 50%
yearly dividend growth rate for the future. In our calculations for Dividend Discount Model, our
numbers were found through evaluation of many sources. Our beta (1.28326) was found from
Yahoo Finance, and we found that, amongst in the cyclical market that Delta operates in; this
8. 8
source gave us the most comfortable, accurate number (we found that this same reasoning
applies to why we continued to use this sources number’s over other sources number’s later on).
Our risk-free rate of 3.01% was found by researching the 30-year Treasury bond rate found on
Treasury.gov. We decided to use this long-term bond because Delta is so volatile in the short-
term market, so we decided that using a long term bond yield would give us a reasonable risk-
free rate. In addition, we felt comfortable using this number because 3% is also historically the
rate of inflation. Market Risk (11.53%) was found on nyu.edu (Damodaran), which had a chart
that shows the S&P 500’s yearly stock returns from 1928-2014. Our group used this number
because the S&P is commonly used to measure market inflation and we figured this number
would be the best option because it showed the average stock return for nearly the past hundred
years, which means that number had been through an up and down cycle, much like the airline
industry has been. By utilizing the above three numbers, we found our Cost of Equity to be
13.943% [B1]. For our growth rate, every number we could find outweighed our Cost of Equity,
which meant that our estimated Stock Price would not be close to correct, as the future estimated
dividends past the year 2017 would be negative, which is not correct. So, to try and make the
model work, we decided to use American Airlines dividend growth rate of 10.34%. Both
companies have similar Total Assets and Sales, so we thought this growth rate would at least
give us a good indication of a stock price for Delta. Delta’s Weighted Average Cost of Capital,
or WACC [B2], was calculated to be 11.673%. Because we were forward looking in this model,
we had to use future estimated dividends for Delta, which we found on FactSet.
9. 9
Dividend Discount Model
[B3]
As you can see, the estimated growth rate we attempted to use did not fit with Delta, as it
gave us a stock price ($17.28) way below the current stock price. So, we concluded that until
Delta begins to start growing their dividends at a more constant and stable pace, the Dividend
Discount Model is not a reliable model to find their stock price, thus, becoming the con of our
model (alike to the Method of Comparables). The “potential” pro of this model would be that,
had we had a reasonable growth rate, this model would give us a more accurate stock price and
allow us great practice for calculating this model with all of the potential number inputs available
for use.
d. DCF Model
Our Discounted Cash Flows Model began with finding the growth rate for years 2014
through 2017 [C1]. When analyzing the cash flows for Delta we found that the average growth
rate over this time span was just too large to use in our calculations as it would produce a
negative number. We believe the reason for this volatility is due to a general overall increase in
investment expenditures, for example: Delta purchased an oil refinery in 2012 as a way to help
protect themselves from potential future oil price increases. Delta’s cash flows and cash flow
estimates have been leveling out beginning in 2015 as investments have slowed down and
10. 10
interest expense has decreased. Therefore, we believe that the free cash flow growth rate
between 2016 and 2017 of 4.49% [C2], which is the exact same as Southwest over those two
years, is a more accurate measure of sustainable growth because it does not include the results of
Delta’s recent large scale investments such as the purchase of their oil refinery. We did not use
American Airlines or United Airlines as comparisons in determining the growth rate because
their cash flows were too volatile even between the years of 2016 and 2017. To calculate the
WACC we found the weight of debt (23.92%) and the weight of equity (76.08%) using the
numbers we pulled from Yahoo Finance. We calculated the cost of debt (7.0293%) using the
numbers from FactSet for the longest outstanding bond to find its yield to maturity. We
calculated the tax rate (36.53%) from Delta’s income statement for the most recent year.
DCF Table
[C3]
Using Delta’s free cash flow numbers, the WACC, and the 4.49% growth rate we
determined the value of the firm to be $65,041 million [C4]. We pulled the value of debt from
Yahoo Finance and subtracted it from the value of the firm to get an equity value of $52,492
million. We also pulled the number of shares outstanding (795.4 million) from Yahoo Finance
and divided that into our value of equity to get our estimated price of $65.99. Due to only being
able to use the growth rate between two years rather than an average over several years this price
may not be as accurate as we would like; however, we also believe that the growth rate we used
11. 11
is reasonable and sustainable. Given that Delta’s current price hovers around $50.00, according
to our free cash flow model it would be advantageous to invest in Delta. So a pro for this model
is that it gave us a statistical reason to believe that Delta’s stock price is undervalued. However, a
con for this model is that because Delta’s original growth rates were too high to use for this
model, we had to estimate a growth rate that may not be entirely accurate, so there is a possibility
using that growth rate may have given us a number that shouldn’t be trusted. But we do believe
this growth rate is an achievable number for Delta to grow by over the long term.
e. RE Model
Our Residual Earnings model numbers were all found on FactSet and started from 2013
in order to have more available numbers to use in this particular model. We used this strategy
because the Residual Earnings Model depends a lot on using past financial numbers to calculate
the future numbers. The trickiest variable we came across is the book value per share, of which
was 0.44 in 2013 and jumped to 13.56 in just one year at 2014, which was found on FactSet.
Through research, we may note that this increase can be contributed to Delta’s recent
investments such as purchasing of oil refineries in that year. Our generation certainly
experienced the elastic cost of fuel with its rapid increase in 2006 and ups and downs since, and
in the airline industry, oil prices reflected in plane tickets more than ever. In 2012, Delta made a
purchase of an oil refinery with estimates that it would save them around $300 million in fuel
each year, thus, we could see on FactSet that investments like this helped increase their book
value for 2013. For this model’s growth rate, it was still hard to find a concrete variable because
Delta’s numbers change so often. The book value has gone up at a steady rate and retained
earnings have been going up and down. So, we found the growth rate [D1] bytaking years 2017 to
12. 12
2014 percentage change as the overall average instead of change from in between each number.
We then found the NPV, Value of Equity, to be $37.53 per share through our own calculations.
Residual Earnings Model
[D2]
Again, we do not believe this number is extremely accurate and would not recommend
using it to value Delta’s stock. This inaccurate number arises from two different main causes.
First, since Delta’s Book Values are growing at such a large rate and started at such a low rate,
the actual growth rate for Delta was too large to use for this model. In addition, our estimated
growth rate did not work out simply because Delta’s numbers were too scattered and not
showing a constant growth trend- thus, once again being a con for a model. A pro for this model
is that it tends to focus on value drivers, such as investments and growth in investment, which
tend to drive value.
f. AEG Model
When evaluating Delta using the Abnormal Earnings Growth Model, we pulled our
earnings per share and dividends per share numbers from FactSet for the years 2013 through
2017 projections. After calculating the earnings on reinvested dividends [E1], the cumulative
dividend earnings [E2], normal earnings [E3], and the abnormal earnings growth [E4], we attempted
to calculate a year-to-year growth rate using the AEG numbers to use in our present value of
13. 13
future growth. However, because the AEG numbers for Delta have erratic growth rates from
year to year, we looked at the growth rates for cumulative dividend earnings and normal
earnings. The growth in these numbers were more stable, but still too high overall to work in our
formula. In order to ascertain a workable growth rate, we took the two lowest year-to-year
growth rates for both cumulative dividend earnings and normal earnings and averaged them
together to get a conservative growth rate of 6.72% [E5]. We believe 6.72% is a reasonable
growth rate to use because it is a little higher that the growth rates in other models, and we prefer
this because Delta just recently started paying dividends and their dividends are expected to grow
in the future causing higher reinvestment of dividends. Earnings are also expected to increase in
the future, and with both of these numbers projected to increase, we believe that 6.72% is a
reasonable and sustainable growth rate. We also decided to exclude the 2017 AEG number from
our calculations because it was negative and we therefore classified it as an outlier that is not
representative of the future expected growth of the company.
AEG Model
[E6]
Using the AEG numbers from 2014 through 2016 and the cost of equity of 13.943%, we
arrived at a valuation of $73.08- which is a pro because the model we are most confident in
(DCF Model) also gave us a price over the current stock price. Since Delta’s stock price is
currently around $50.00, this number would indicate that the company is undervalued. However,
a con for this method is that we once again had to use a growth rate we are not that confident in,
14. 14
but that arises from the fact Delta’s numbers are all over the place. Therefore, we do not
recommend trusting this model completely.
15. 15
3. ImportantFinancial Ratios
a. DuPont Analysis
By researching Delta’s and their competitor’s numbers on FactSet, we were able to find
the following numbers required for DuPont Analysis. With regards to their Profit Margin, Delta
is doing reasonably well with a 6.94% margin. However, they are behind all three of their
competitors, with United Continental holding the highest margin at 17.16%. This tells us that
Delta could do better in getting more money out of selling their services relative to the costs of
the service.
In addition, Delta also has the lowest Asset Turnover with only 0.71, which shows that
the value of their assets outweighs their revenue. Again, United Continental has the highest with
1.05. This low turnover is reasonable, considering that the planes the Airliner’s own cost
millions of dollars. For example, out of 618 planes Delta owns, 87 of those are B757-200s, with
each of those planes costing roughly $80 million. As you can see, the planes they own are worth
billions of dollars by themselves. You also have to consider the other assets Delta owns, such as
hangars for plane storage.
In comparison to its competitors, Delta has the 3rd highest Equity Multiplier, with 5.55,
telling us that for every $5.50 of assets Delta owns, they have $1 in Shareholders equity. This
represents a favorable Financial Leverage and a strength for the company, as it shows Delta does
not rely too much on debt to help fund their operations, especially when compared to American
Airlines and United Continental do, who have respective Equity Multipliers of 49.48 and 13.79.
Overall, Delta has the second lowest Return on Common Equity (or ROCE) with a 0.273
ratio. Even though this seems like a low number, it still shows Delta is still doing reasonably
well, as this number is greater than their Cost of Capital (which was 0.11675).
16. 16
4. Conclusion
a. After completing all six models, we found there was never a consistent stock price found
between any of them. This lack of consistency came from the inconsistent growth patterns of not
only Delta, but the inconsistency of airline industry as well. However, our group believes the
most accurate model we used was the Discounted Cash Flow Model, as the growth rate we used
for it was what we believed to be the most accurate one we used for all of the models. The only
real serious concern we have for Delta is that the company, like all other airliners, is extremely
vulnerable to changing oil prices. While oil prices have been low and steady recently, we all
know too well that this can change very quickly. Even though Delta has taken steps to help make
sure rising prices won’t affect them as much, the airline industry is dependent on oil, and any rise
in oil will have a negative effect on all airline companies. Also, with all the competition Delta
faces, it will be always be a challenge for them to keep their customer base from leaving to
perhaps go to another airliner for cheaper fares, better customer rewards, etc.
b. Based on our findings and research, we believe the current price of Delta’s stock presents an
undervaluation of the company, and thus believe that you should buy shares of Delta. We came
up with this conclusion because even though the models done in Section Two gave us
inconsistent stock prices, the one model we felt best about (Discounted Cash Flow Model) gave
us a stock price that was higher than Delta’s current one. In addition, another reason we believe
Delta’s stock price is undervalued is that from researching Delta and seeing how well the
company is doing overall and the positive numbers the company is expected to post in the
upcoming years, it is evident that the stock price will go up, it is only a matter of time. In fact,
according to the article “These are the only three S&P 500 companies with 100% buy ratings”
published on marketwatch.com, Delta was one of only three companies on the S&P 500 the
17. 17
website gave a 100% recommendation to buy label to. In conclusion, while the numbers for
Delta were not always able to be compatible with our Financial Models, the numbers that were
always gave us a stock price higher than Delta’s current one, which gives us an undervalued
indication for the company.
18. 18
Works Cited
Damodaran,Aswath.http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/hitret
P.html. NYU.edu. Web. 10 November 2015.
Van Doorn, Philip. http://www.marketwatch.com/story/these-are-the-only-three-sp-500
companies-with-100-buy-ratings-2015-11-17. Marketwatch.com Web. 17 November
2015.
Delta Air Lines, Inc. Annual Report for fiscal year ended December 31, 2011. February 10,
2012. Web. November 1, 2015.
Delta Air Lines, Inc. Annual Report for fiscal year ended December 31, 2012. February 13,
2013. Web. November 1, 2015.
Delta Air Lines, Inc. Annual Report for fiscal year ended December 31, 2013. February 24,
2014. Web. November 1, 2015.
Delta Air Lines, Inc. Annual Report for fiscal year ended December 31, 2014. February 11,
2015. Web. November 1, 2015.
http://cbonds.com/emissions/issue/64841. Financial Bonds Information, 2004. Web. 10
November 2015.
Timeline of Airline. News Hub. Delta News Hub, 18 Aug. 2015. Web. 1 Nov. 2015.
<http://news.delta.com/timeline-airline>.
http://www.treasury.gov/resource-center/data-chart-center/interest
rates/Pages/TextView.aspx?data=yield. U.S. Department of the Treasury. Web.10
November 2015.
20. 20
Appendix
Appendix A: Method of Comparables
1. With this method, we used the P/S, P/E, and P/B ratios of Delta’s three competitors and
averaged them. Then, we took those averages and multiplied Delta’s Sales and the
average P/S ratio, Delta’s earnings and the average P/E ratio, and Delta’s Book Value and
the average P/B ratio to find new estimates for Delta. We then took the average of those
three new numbers and proceeded to divide the average by the number of shares
outstanding for Delta to find a new estimated Stock price.
2. Estimated Cost of Delta’s Stock was calculated in our chart by taking the average of our
estimates and dividing by number of shares outstanding.
3. Current stock price for Delta of $50.58 was found on November 10, 2015 on Yahoo
Finance.
Appendix B: Dividend Discount Model
1. Delta’s Cost of Equity was calculated by using the formula:
Re = Rf + β [Rm – Rf] = 0.0301 + 1.28326 [0.1153 -0.0301]
Cost of Equity (Re) = 0.1394 or 13.94%
2. WACC was calculated by locating Delta’s financial numbers from Yahoo Finance and
using the latest quarter’s tax rate of 36.53%. Delta’s short and long-term debt totaled to
$12.549bil, they had no preferred stock, and their common shareholder’s equity totaled
$39.905bil (Calculation of that number came from multiplying their stock price of $50.74
by shares outstanding of 787.47 million). The cost of debt (7.0293) was calculated by a
yield of 2027, a coupon of 3.625%, a future value of 1,000 and a present value of
1,017.50 (numbers found from the Delta FactSet page). The weight of debt for Delta was
21. 21
found by dividing Delta’s debt by the sum of Delta’s debt and their Common
Shareholder’s Equity. Remember that Delta had a Cost of Equity of 13.94%
WACC = WdRd(1-T) + WpRp+ WeRe (*but no preferred stock for Delta*)
WACC = (0.2392)*(0.070293*(1-0.3653)) + 0 + (0.7608)*(0.1394)
WACC = 11.673%
3. To find an estimated stock price for Delta using this model, we used the dividends
starting with 2014 and went until 2017 (years 2016-2017 being estimated dividends
found from FactSet). We also had to find the expected value of dividends going past
2017. To do this, we have to use the dividend growth of equation of:
𝐹𝐶𝐹𝑥(1+ 𝑔)
𝑅𝑒 − 𝐺
We then plug in our corresponding numbers:
0.77(1+ 0.1034)
0.13943 − 0.1034
= 23.581
After finding this number we then find our stock price by using the NPV function. We
used the following numbers in the NPV function:
CFo = 0
CF1= 0.44
CF2= 0.56
CF3= 0.77 + 23.581 = 24.351
NPV = $17.278
Appendix C: DCF Model
1. The growth rate for years 2014 through 2017 was calculated by the equation:
(𝑌𝑒𝑎𝑟 1− 𝑌𝑒𝑎𝑟 2)
(𝑌𝑒𝑎𝑟 1)
22. 22
2. Free cash flow growth rate between 2016 and 2017 is calculated by utilizing the above
equation and inputting the FCF:
(4,925−5,146 )
(4,925)
= 4.49%
3. We used the same WACC that we calculated above. This can be found in Appendix B-
B2. We used the information from this table to help us calculate Delta’s Value of Firm,
which is explained below in C4.
4. To find Delta’s Value of Firm, we used their Free Cash Flows for years 2014-2017
(years 2015-2017 are estimated numbers found on FactSet) and found their future
dividends past 2017 using the following equation:
𝐷𝑥(1+ 𝑔)
𝑊𝐴𝐶𝐶 − 𝐺
Then we plugged in the corresponding numbers:
5,146(1+ 0.0449)
0.1168 − 0.0449
= $74,785.12
After finding this number we plug our numbers into the NPV function to find Delta’s
Value of Firm:
CFo = 0
CF1 = 4,142
CF2= 4,925
CF3= 5,146 + 74,785.12
I = WACC = 11.68%
NPV = VoF= $65,041
We then proceeded to subtract our Value of Firm ($65,041bil) by Value of Debt
($12,549bil- found on Yahoo Finance) to get a Value of Equity of $52,492bil for Delta.
To find Delta’s stock price, we take their Value of Equity and divide by number of shares
outstanding (795.4millon) to find an estimated stock price of $65.99.
23. 23
Appendix D: RE Model
1. We found the growth rate by again using the equation mentioned above in Appendix
C: C1. Then we plugged in the corresponding numbers to find our growth rate:
3.2887 − 3.4853
3.2887
= 5.98%
2. To find our Value of Equity for Delta for this model, we have to estimate Delta’s BV
and RE for years 2014-2017. Off the bat, we are given the BV, Earnings, and
Dividends for 2013, along with the estimated BV, Earnings and Dividends for 2014-
2017. We again used our Cost of Equity of 13.94%. We then had to estimate Delta’s
RE for years 2014-2017 using the following equation:
RE1= E1 – (Re * BVo)
We then used this equation to solve for our missing RE:
RE2014 = 3.35 – (0.1394*0.44) = 3.2887
RE2015 = 4.64 – (0.1394*13.56) = 2.7497
RE2016 = 5.73 – (0.1394*14.51) = 3.7073
RE2017 = 6.12 – (0.1394*18.90) = 3.4853
After this, we find future RE for years past 2017 by using the same equation found in
Appendix B:B3, except we replace the Dividend with RE:
3.4853(1 + 0.0598)
(0.1394 − 0.0598)
= 46.40
We then plug our numbers into an NPV function to find our Value of Equity:
CFo= BVo = 0.44
CF1 = 3.2687
CF2 = 2.7497
CF3 = 3.7073
CF4 = 3.4853 + 46.40 = 49.885
I = Re = 13.94%
NPV = VoE = $37.53
24. 24
Appendix E: AEG Model
1. To find Delta’s Earnings on Reinvested Dividends we used the following equation:
EoRD1 = Do * Re
Using this equation, we found Delta’s EoRD for years 2014-2017
EoRD2014 = 0.12 *0.13943 = 0.017
EoRD2015 = 0.30 * 0.13943 = 0.042
EoRD2016 = 0.44* 0.13943 = 0.061
EoRD2017 = 0.56* 0.13943 = 0.078
2. To find Delta’s Cum-Dividend Earnings, we used the following equation:
CDEt = Et + Re*Dt-1
We then used this equation to find Delta’s CDE for years 2014-2017:
CDE14 = 3.35 + 0.13943*(0.12) = 3.367
CDE15 = 4.64 + 0.13943*(0.30) = 4.682
CDE16 = 5.73 + 0.13943*(0.44) = 5.791
CDE17 = 6.12 + 0.13943*(0.56) = 6.198
3. To find Delta’s Normal Earnings, we used the following equation:
NEt = Et-1*(1+Re)
We then used this equation to find Delta’s NE for the years 2014-2017:
NE2014 = 3.15*(1+0.13943) = 3.59
NE2015 = 3.35*(1+0.13943) = 3.82
NE2016 = 4.64*(1+0.13943) = 5.29
NE2017 = 5.73*(1+0.13943) = 6.53
4. To find Delta’s AEG, we simply use the equation:
AEGt = CDEt – NTe
We then used the equation to find Delta’s AEG for the years 2014-2017
AEG2014 = 3.367-3.59 = -0.223
AEG2015= 4.682-3.82 = 0.86
25. 25
AEG2016 = 5.791-5.29 = 0.501
AEG2017 = 6.198 – 6.530 = -0.332
5. To find our estimated growth rate for this model, we did the following:
CDE (Year) 2014 2015 2016 2017
% Change - 39% 23.69% 7.03%
NE (Year) 2014 2015 2016 2017
% Change - 6.4% 38.48% 23.40%
Average of 7.03% and 6.4% = 6.72% = growth rate
6. To find our stock price for Delta, we set up the following NPV Cash Flows, but again, we
have to find our expected future AEG rate after 2017, so to do that we must again use the
constant growth equation using AEG:
0.501(1 + 0.0672)
0.13943 − 0.0672
= 7.40
Then we proceed with our NPV Function:
CFo = E1 = 3.35
CF1 = 0.86
CF2 =0.501 + (7.4) = 7.901
I = Re = 13.943%
NPV = 10.19
We then take our NPV of 10.19 and divide it by our Re (13.943%) to find our stock price
of $73.08
