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Cost of Capital and Valuation

Cost of Capital and Valuation. Southwest Airlines: Business Description. Southwest Airlines Co. operates Southwest Airlines and AirTran Airways, major passenger airlines that provide scheduled air transportation in the US and near-international markets

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Cost of Capital and Valuation

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  1. Cost of Capital and Valuation

  2. Southwest Airlines:Business Description • Southwest Airlines Co. operates Southwest Airlines and AirTran Airways, major passenger airlines that provide scheduled air transportation in the US and near-international markets • As of December 31, 2012, the company served 97 destinations in 41 states and consisted of 694 aircrafts • Known for conveniently timed flights, low fares, and no supplementary fees for baggage • Boeing is Southwest’s sole supplier for aircrafts • The company’s business is somewhat seasonal and greater during summer months

  3. Southwest and AirTran Acquisition • On May 2, 2011, Southwest acquired all of the outstanding equity of AirTran Holdings, Inc. whose parent company was AirTran Airways • Note 1: Summary of Significant Accounting Policies states the accompanying Consolidated Financial Statements for 2011 include the results of operations and cash flows for AirTran from May 2, 2011 through December 31, 2011

  4. Different Costs of Capital

  5. Cost of Capital for Enterprise Operations

  6. Cost of Equity Capital

  7. Regression to Find Beta

  8. Cost of Equity Capital Assumed 3.69% for the 30-year T-bond from Yahoo Finance and assumed 5% for the market risk premium Beta is reasonable because it states that Southwest is riskier than the market and this seems acceptable for the airline industry

  9. Beta Estimates • http://www.google.com 1.14 • http://www.nasdaq.com1.47 • http://investing.money.msn.com1.14 • http://www.reuters.com 1.08 • http://finance.yahoo.com0.86 • http://www.nyse.com 1.08 • http://finance.comcast.net 1.08 • http://www.zacks.com 1.14 • http://data.cnbc.com 1.05

  10. Cost of Debt Capital

  11. Calculating Cost of Debt Capital Cost of Debt= (131/2820)*(1-.37) = 2.93%

  12. Cost of Enterprise Capital

  13. Discounted Cash Flow Model

  14. Works Cited • Capital IQ • SEC website • Module 6 from Cost of Capital and Valuation • Yahoo Finance

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