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Valuation using Abnormal Enterprise Income Growth Model

Valuation using Abnormal Enterprise Income Growth Model. 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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Valuation using Abnormal Enterprise Income Growth Model

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  1. Valuation using Abnormal Enterprise Income Growth Model

  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. Understanding the Abnormal Enterprise Income Growth Model

  5. Valuing Southwest Estimated sales growth rate: 4.0% Perpetuity growth rate: 2.5% EPM: 5.0% EATO: 2.26 Estimated growth rate beyond 2019: 3.0% Estimate of enterprise cost of capital: 9.53% V= $9,853

  6. Discounted Cash Flow Model $9,853 is the estimated intrinsic value of enterprise operations of Southwest based on my assumptions thus far.

  7. Valuing Southwest Estimated sales growth rate: 4.0% Perpetuity growth rate: 2.5% EPM: 5.0% EATO: 2.26 Estimated growth rate beyond 2019: 3.0% Estimate of enterprise cost of capital: 9.53% V= $9,853

  8. Residual Income Model

  9. Valuing Southwest Estimated sales growth rate: 4.0% Perpetuity growth rate: 2.5% EPM: 5.0% EATO: 2.26 Estimated growth rate beyond 2019: 3.0% Estimate of enterprise cost of capital: 9.53% V= $9,853

  10. Abnormal Enterprise Income Growth Model

  11. Choosing a Valuation Model Consider how much estimated value is captured in the forecasted horizon Conclusion: Income models capture more value in the forecasted horizon than the DCF

  12. Works Cited • Capital IQ • SEC website • Module 7 from Valuation using Abnormal Enterprise Income Growth Model • 2013 10-K Earnings Conference Call

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