7-2 Final Project I Submission: Corporate Valuation Report

5-1 Final Project I Milestone Two: Capital Structure and Valuation

Cierra Bogan

Southern New Hampshire University

October 5, 2021

III (A): Capital Structure Overall

To get a better understanding of your corporation, such as Southwest Airlines, knowing

what their capital structure consist of is important. “Capital structure refers to the amount of debt

and/or equity employed by a firm to fund its operations and finance its assets. A firm’s capital

structure is typically expressed as a debt-to-equity or debt-to-capital ratio” (Capital Structure,

2020). Southwest Airlines debt was $2.737,000 and the equity was $19,856,000 to give them a

capital of $22,593,000. The equity was 87.9% and the debt is 12.1%, the capital must equal to

100%. A lot of Southwest Airlines shortcomings was due to the recent year of 2020 COVID-19

pandemic that halted a lot of flights due to surge in illness and deaths occurring around the

world. Despite the halt of flying in 2020, Southwest doesn’t hold a heavy debt load even though

their revenue shrunk.

III (B): Capital Structure: Dividend Policy

Southwest dividends have increased each year until the year 6/4/2019, which has been at

a halt at $0.18 for the last 2 years straight. Since Southwest Airlines does not have a heavy debt

hold, the stakeholders will still get paid.

III (C): Capital Structure Relationship

The capital structure is significantly made up of owner equity. The estimated cost of

equity for Southwest Airlines is 15.1%. In comparison, the cost of capital for “other” debt is

13.78% and leases is 12.1%. The WACC is 26.57% which is very close to the cost of equity.

Because of their leverage of debt in the capital structure, there is little risk of Southwest

defaulting on debt or lease payments. Southwest financial risk will continue to increase if their

structure increases. Long as Southwest is not declining in revenue and profits, they will be less

vulnerable to accumulating high risk for their stakeholder.

III (D): Capital Structure Maximize Value

If Southwest acquire an expansion to more city’s countries, which means they will be

taking on more debt due to that expansion, but it will be a positive look for investors to see more

revenue soon. This will be considered a maximize corporate value for the company. WACC is

important to look at because of the tax bracket is normally smaller than debt.

IV (A): Valuation Current Value

IV (B); Valuation Current Assumptions

Southwest will need to add more locations to gain more revenue and compete heavily with their

competitors on destinations. Recently in the new Southwest Airlines has a made high amount of

cancellation of flights due to a multiple of reasons, and of them being shortage of staff and

inclement weather.

Dividend Payments

(188,000)

(138,048)

(120,613)

(113,030)

(109,436)

(107,534)

(776,660)

Other Financing Activities

237,000

174,029

152,049

142,490

137,959

135,561

979,088

Cash Flow from Financing Activities 9,658,000

7,091,869

6,196,166

5,806,613

5,621,963

5,524,253

39,898,865

Cumulative Translation Adjustment 8,515,000

8,515,000

8,515,000

8,515,000

8,515,000

8,515,000

51,090,000

NET CASH FLOW

17,030,000

14,767,565

13,977,866

13,634,415

13,471,618

13,385,472

86,266,935

Free Cash Flow (6,722,000)

(4,935,965)

(4,312,552)

(4,041,422)

(3,912,905)

(3,844,899)

(27,769,742)

VALUATION CALCULATIONS FREE CASH FLOW "FCF" (from above)

(6,722,000)

(4,935,965)

(4,312,552)

(4,041,422)

(3,912,905)

(3,844,899)

(27,769,742)