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Delta Airlines Module 7: REI

Delta Airlines Module 7: REI. Residual Enterprise Income 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. Valuation Using Cash Flows. Calculating free cash flows

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Delta Airlines Module 7: REI

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  1. Delta AirlinesModule 7: REI Residual Enterprise Income 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. Valuation Using Cash Flows • Calculating free cash flows • Cash flow valuation is used because the valuation is based on the opportunity to receive cash payoffs in the future • Determining the amount, timing and uncertainty of future payoffs can be challenging

  4. Assumptions • REq = 7.45% • RD = 2% • β= 1.16 • Market premium =5% • REnt= 4.76%

  5. Residual enterprise income • REIt=EPATt-(rEnt*NEAt-1) • Residual enterprise income valuation model anchors the valuation on the current book value of net enterprise assets (NEA0) and future residual enterprise income serves as the adjustment to this valuation to counter the effect that accounting rules and procedures have on this valuation starting point • Residual income models look at the economic profitability of a firm rather than just its accounting profitability

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