COST OF CAPITAL STUDY YIELD CAPITALIZATION 2016 ASSESSMENT YEAR APPENDIX C PASSENGER AIRLINES EQUITY RATE 13.00% CAPITAL ASSET PRICING MODEL PAGE CAPM Ex Ante 9.05% 6 DIVIDEND GROWTH MODELS Value Line, based on Dividends Growth NMF 8 Value Line, based on Earnings Growth 15.00% 9 Value Line, based on Return on Equity NMF 10 RANGE 9.05% - 15% DEBT RATE 7.15% 11 COST OF SECURED DEBT (LEASE) RATE COST OF SECURED DEBT (LEASE) RATE 4.15% 4.15% 11 11 MARKET CAPITAL STRUCTURE Equity 50% x 13.00% = 6.50% 3 Operating Leases 30% x 4.15% = 1.25% 3 Debt 20% x 7.15% = 1.43% 3 Marginal Tax Rate 38% = (1-.038) x 1.43% 0.89% WEIGHTED AVERAGE COST OF CAPITAL 8.63% 8.6% rounded 1
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COST OF CAPITAL STUDY - Washington...SUPPORT FOR CAPITAL STRUCTURE MARKET VALUE WASHINGTON STATE DEPARTMENT OF REVENUE 2016 ASSESSMENT YEAR PASSENGER AIRLINES Capital Structure at
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COST OF CAPITAL STUDY
YIELD CAPITALIZATION
2016 ASSESSMENT YEAR
APPENDIX C
PASSENGER AIRLINES
EQUITY RATE 13.00%
CAPITAL ASSET PRICING MODEL PAGE
CAPM Ex Ante 9.05% 6
DIVIDEND GROWTH MODELS
Value Line, based on Dividends Growth NMF 8
Value Line, based on Earnings Growth 15.00% 9
Value Line, based on Return on Equity NMF 10
RANGE 9.05% - 15%
DEBT RATE 7.15% 11
COST OF SECURED DEBT (LEASE) RATECOST OF SECURED DEBT (LEASE) RATE 4.15%4.15% 1111
MARKET CAPITAL STRUCTURE
Equity 50% x 13.00% = 6.50% 3
Operating Leases 30% x 4.15% = 1.25% 3
Debt 20% x 7.15% = 1.43% 3
Marginal Tax Rate 38% = (1-.038) x 1.43% 0.89%
WEIGHTED AVERAGE COST OF CAPITAL 8.63% 8.6%�
rounded
11
SUPPORT FOR GUIDELINE COMPANIES WASHINGTON STATE DEPARTMENT OF REVENUE
BETA CALCULATION FOR CAPM WASHINGTON STATE DEPARTMENT OF REVENUE
2016 ASSESSMENT YEAR
PASSENGER AIRLINES
Company Ticker Value Line
Alaska Air Group, Inc. ALK 1.10
0.70
1.20
1.20
1.05
1.10
1.20
1.05
1.10
Allegiant Travel Co ALGT
American Airlines Group AAL
Delta Air Lines, Inc. DAL
Hawaiian Holdings, Inc. HA
JetBlue Airways Corp. JBLU
SkyWest, Inc. SKYW
Southwest Airlines Co. LUV
United Continental Holdings, Inc. UAL
Mean
Median
Harmonic Mean
Max
Min
1.08
1.10
1.05
1.20
0.70
Source: Value Line-five year, weekly Say 1.10
7
SUPPORT FOR YIELD CAPITALIZATION EQUITY COMPONENT DIVIDEND GROWTH MODEL
WASHINGTON STATE DEPARTMENT OF REVENUE
2016 ASSESSMENT YEAR
PASSENGER AIRLINES
Based on Dividend Growth
Ke = (D1 / Po) + GD
Ke = Cost of Equity
D1 = Expected Dividends
P0 = Current Stock Price
GD = Sustainable Growth -- Dividend
assumption: Sustainable growth can not exceed inflation plus real GDP
Company Ticker
Stock
Price
(Po)
Expected Dividend
(D1)
Dividend
Yield
(D1/Po)
Dividend
Growth (G) Ke
Forecast
Dividend
Growth
Ke
Forecast
Growth
Sustainable
Dividend
Growth
Ke
Sustainable
Growth
Ke with Multi
Stage Growth
Adj Alaska Air Group, Inc. ALK 80.20 1.10
1.20
0.60
0.62
0.00
0.00
0.16
0.38
0.00
1.37% 37.50%
9.09%
50.00%
37.78%
0.00%
31.03%
38.87% 28.35% 29.72%
0.72%
1.42%
47.20%
45.67%
4.00%
0.00%
0.00%
4.00%
4.00%
5.37%
0.72%
1.42%
5.23%
4.88%
16.39%
4.75%
17.78%
23.96%
4.84%
20.75%
Allegiant Travel Co ALGT 167.54 0.72% 9.81% 0.00%
0.00%
45.98%
44.78%
American Airlines Group AAL 42.23 1.42% 51.42%
Delta Air Lines, Inc. DAL 50.53 1.23% 39.00%
Hawaiian Holdings, Inc. HA 35.33
JetBlue Airways Corp. JBLU 22.65
SkyWest, Inc. SKYW 18.98 0.84%
Southwest Airlines Co. LUV 42.98 0.88% 31.92%
United Continental Holdings, Inc. UAL 57.30
Mean
Median
Harmonic Mean
Max
Min
Std Dev
Coeficient of Variation
1.08%
1.06%
1.01%
1.42%
0.72%
0.3%
0.28
34.20%
38.87%
24.50%
51.42%
9.81%
15.3%
0.45
24.95%
29.72%
2.30%
47.20%
0.72%
22.8%
0.92
3.52%
4.88%
1.86%
5.37%
0.72%
2.3%
0.64
14.74%
17.09%
9.61%
23.96%
4.75%
8.1%
0.55
Source: Value Line Projections 12-14 to 18-20
to page 1
Say NMF
Value Line Projections are incomplete and/or at
unsustainable levels. Data sets have high coefficients of
variation. No meaningful figure can be reconciled from the
inputs.
8
SUPPORT FOR YIELD CAPITALIZATION EQUITY COMPONENT DIVIDEND GROWTH MODEL
WASHINGTON STATE DEPARTMENT OF REVENUE
2016 ASSESSMENT YEAR
PASSENGER AIRLINES
Based on Earnings Growth
Ke = (D1 / Po) + G
Ke = Cost of Equity
D1 = Expected Dividends
P0 = Current Stock Price
G = Sustainable Growth -- Earnings
assumption: Sustainable growth can not exceed inflation plus real GDP
Company Ticker
Stock
Price
(Po)
Expected Earnings
(D1)
Yield
(D1/Po)
Earnings
Growth (G) Ke
Forecast
Earnings
Growth
Ke
Forecast
Growth
Sustainable
Earnings
Growth
Ke
Sustainable
Growth
Ke with Multi
Stage Growth
Adj Alaska Air Group, Inc. ALK 80.200 7.50
14.10
7.25
6.55
3.60
2.55
2.10
4.00
9.25
9.35% 15.38%
9.13%
-35.78%
42.08%
20.81%
28.79%
-7.89%
22.32%
-22.14%
24.74% 20.12%
22.68%
25.92%
23.77%
46.89%
34.21%
42.03%
29.47%
31.09%
38.88%
33.95%
58.15%
45.27%
51.33%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
13.35%
12.42%
21.17%
16.96%
14.19%
15.26%
15.06%
13.31%
13.70%
13.67%
NMF
14.89%
14.32%
20.56%
18.68%
20.20%
15.55%
Allegiant Travel Co ALGT 167.540 8.42% 17.55%
American Airlines Group AAL 42.230 17.17%
Delta Air Lines, Inc. DAL 50.530 12.96% 55.05%
Hawaiian Holdings, Inc. HA 35.330 10.19% 31.00%
JetBlue Airways Corp. JBLU 22.650 11.26% 40.05%
SkyWest, Inc. SKYW 18.980 11.06% 3.17%
Southwest Airlines Co. LUV 42.980 9.31% 31.63%
United Continental Holdings, Inc. UAL 57.300 16.14%
Mean
Median
Harmonic Mean
Max
Min
Std Dev
Coefficient of Variation
11.76%
11.06%
11.14%
17.17%
8.42%
0.03
26.22%
29.02%
31.00%
13.46%
55.05%
3.17%
16.5%
0.57
41.17%
38.88%
38.88%
58.15%
29.47%
10.8%
0.26
15.21%
14.63%
14.84%
21.17%
12.42%
2.8%
0.18
16.45%
15.22%
16.03%
20.56%
13.67%
2.9%
0.18
Source: Value Line Projections 12-14 to 18-20 Say 15.00%
to page 1
8
SUPPORT FOR YIELD CAPITALIZATION EQUITY COMPONENT DIVIDEND GROWTH MODEL
WASHINGTON STATE DEPARTMENT OF REVENUE
2016 ASSESSMENT YEAR
PASSENGER AIRLINES
Based on Return on Equity
Ke = (D1 / Po) + G Ke = Cost of Equity D1 = Expected Dividends (Earnings) Po = Current Price G = Sustainable Growth b = Retained Earnings % (plowback) ROE = Return on Equity assumption: Sustainable growth can not exceed inflation plus 5 percent
3 Book Val 300 sum 619.96 $ 286,366,000 Percent of b 206.65% 0.02% $ 560,708,488 195.80% 2.77% $ 7,921,193 0.727%
United Continental Holdings Corp Bond N 4.000 2026 103.055 $ 638,304,000 3.88% 3.61% 0.21% A $ 657,804,187 103.06% 25,532,160 0.213% 0.0026779
United Continental Holdings Corp Bond N 5.500 2022 102.000 $ 107,896,000 5.39% 5.07% 0.05% BBB $ 110,053,920 102.00% 5,934,280 0.050% 0.0006355
United Continental Holdings Corp Bond Y 6.125 2018 100.344 $ 425,000,000 6.10% 5.88% 0.23% BB $ 426,462,000 100.34% 26,031,250 0.230% 0.0029001
United Continental Holdings Corp Bond N 7.875 2021 104.125 $ 84,248,000 7.56% 6.78% 0.05% BB $ 87,723,230 104.13% 6,634,530 0.053% 0.0006631
United Continental Holdings Corp Bond N 4.150 2025 101.000 $ 660,376,000 4.11% 4.01% 0.24% A $ 666,979,760 101.00% 27,405,604 0.244% 0.0030729
United Continental Holdings Corp Bond Y 6.250 2021 102.000 $ 103,856,000 6.13% 5.73% 0.05% BBB $ 105,933,120 102.00% 6,491,000 0.055% 0.0006911
United Continental Holdings Corp Bond 9.558 2021 106.750 $ 64,822,000 8.95% 7.73% 0.05% BB $ 69,197,485 106.75% 6,195,687 0.046% 0.0005813
United Continental Holdings Corp Bond Y 5.983 2023 110.000 $ 598,131,000 5.44% 4.19% 0.23% BBB+ $ 657,944,100 110.00% 35,786,178 0.231% 0.0029114
United Continental Holdings Corp Bond Y 6.903 2022 103.875 $ 162,055,000 6.65% 6.05% 0.09% BB+ $ 168,334,631 103.88% 11,186,657 0.090% 0.0011387
United Continental Holdings Corp Bond Y 9.000 2018 104.480 $ 253,663,000 8.61% 5.80% 0.14% A $ 265,027,102 104.48% 22,829,670 0.135% 0.0017065
United Continental Holdings Corp Bond Y 9.250 2021 112.510 $ 43,698,000 8.22% 6.00% 0.02% BBB+ $ 49,164,620 112.51% 4,042,065 0.024% 0.0003041
United Continental Holdings Corp Bond Y 7.250 2020 104.500 $ 380,164,000 6.94% 5.79% 0.20% A $ 397,271,380 104.50% 27,561,890 0.203% 0.0025562
United Continental Holdings Corp Bond Y 6.000 2022 104.620 $ 64,492,000 5.74% 5.02% 0.03% BBB+ $ 67,471,530 104.62% 3,869,520 0.030% 0.0003756
United Continental Holdings Corp Bond N 4.750 2022 107.900 $ 266,455,000 4.40% 3.16% 0.08% A $ 287,504,945 107.90% 12,656,613 0.078% 0.0009781
United Continental Holdings Corp Bond N 6.900 2019 103.650 $ 34,792,000 6.66% 5.30% 0.02% A+ $ 36,061,908 103.65% 2,400,648 0.017% 0.0002141
United Continental Holdings Corp Bond N 6.900 2018 101.000 $ 2,007,000 6.83% 6.18% 0.00% A $ 2,027,070 101.00% 138,483 0.001% 1.44E-05
United Continental Holdings Corp Bond N 8.048 2022 110.875 $ 148,209,000 7.26% 5.69% 0.08% A $ 164,326,729 110.88% 11,927,860 0.078% 0.0009789
United Continental Holdings Corp Bond N 8.388 2022 100.125 $ 29,157,000 8.38% 8.36% 0.02% BB $ 29,193,446 100.13% 2,445,689 0.022% 0.0002829
United Continental Holdings Corp Bond N 9.798 2022 107.900 $ 142,550,000 9.08% 7.97% 0.10% BB $ 153,811,450 107.90% 13,967,049 0.105% 0.0013185
United Continental Holdings Corp Bond N 6.648 2019 101.250 $ 48,791,000 6.57% 6.09% 0.03% A+ $ 49,400,888 101.25% 3,243,626 0.027% 0.0003451
United Continental Holdings Corp Bond N 6.748 2018 102.750 $ 27,189,000 6.57% 4.80% 0.01% A $ 27,936,698 102.75% 1,834,714 0.012% 0.0001516
United Continental Holdings Corp Bond N 6.820 2018 105.750 $ 18,049,000 6.45% 2.85% 0.00% A $ 19,086,818 105.75% 1,230,942 0.005% 5.97E-05
United Continental Holdings Corp Bond N 6.545 2020 106.000 $ 84,557,000 6.17% 4.65% 0.04% A $ 89,630,420 106.00% 5,534,256 0.036% 0.0004562
United Continental Holdings Corp Bond N 6.795 2020 103.750 $ 1,600,000 6.55% 5.59% 0.00% BBB $ 1,660,000 103.75% 108,720 0.001% 1.037E-05
United Continental Holdings Corp Bond N 7.256 2021 106.400 $ 118,955,000 6.82% 5.61% 0.06% A $ 126,568,120 106.40% 8,631,375 0.061% 0.0007743
United Continental Holdings Corp Bond N 7.566 2021 99.550 $ 6,093,000 7.60% 7.69% 0.00% BBB $ 6,065,582 99.55% 460,996 0.004% 5.437E-05
United Continental Holdings Corp Bond N 7.707 2022 108.375 $ 189,743,000 7.11% 5.88% 0.10% BBB $ 205,633,976 108.38% 14,623,493 0.103% 0.0012952
United Continental Holdings Corp Bond N 8.307 2019 106.750 $ 19,871,000 7.78% 5.35% 0.01% BB $ 21,212,293 106.75% 1,650,684 0.010% 0.0001234
United Continental Holdings Corp Bond N 6.703 2022 105.000 $ 98,030,000 6.38% 5.62% 0.05% A $ 102,931,500 105.00% 6,570,951 0.051% 0.0006396
United Continental Holdings Corp Bond Y 10.400 2018 105.13 $ 138,416,000 9.89% 6.70% 0.09% A+ $ 145,509,820 105.13% 14,395,264 0.085% 0.0010758
United Continental Holdings Corp Bond Y 6.636 2024 103.94 $ 485,086,000 6.38% 5.97% 0.27% BBB $ 504,188,687 103.94% 32,190,307 0.267% 0.0033611
United Continental Holdings Corp Bond Y 4.300 2027 102.63 $ 667,783,000 4.19% 3.99% 0.25% A $ 685,312,304 102.63% 28,714,669 0.245% 0.0030921
United Continental Holdings Corp Bond Y 5.375 2023 100.38 $ 180,512,000 5.35% 5.31% 0.09% BBB $ 181,188,920 100.38% 9,702,520 0.088% 0.0011116
United Continental Holdings Corp Bond Y 3.750 2028 100.00 $ 823,071,000 3.75% 3.75% 0.28% A+ $ 823,071,000 100.00% 30,865,163 0.284% 0.0035826
United Continental Holdings Corp Bond Y 4.625 2024 100.50 $ 238,418,000 4.60% 4.54% 0.10% BBB $ 239,610,090 100.50% 11,026,833 0.100% 0.0012577
United Continental Holdings Corp Bond Y 3.700 2024 101.60 $ 100,000,000 3.64% 3.45% 0.03% A $ 101,600,000 101.60% 3,700,000 0.032% 0.0004009
United Continental Holdings Corp Bond Y 3.450 2029 100.38 $ 333,652,000 3.44% 3.41% 0.10% AA $ 334,903,195 100.38% 11,510,994 0.105% 0.0013217
United Continental Holdings Corp Bond Y 9.750 2018 104.75 $ 225,497,000 9.31% 6.33% 0.13% A $ 236,208,108 104.75% 21,985,958 0.132% 0.0016572
United Continental Holdings Corp Bond Y 6.375 2018 103.50 $ 300,000,000 6.16% 3.93% 0.11% BB $ 310,500,000 103.50% 19,125,000 0.109% 0.0013674
United Continental Holdings Corp Bond Y 6.000 2020 103.47 $ 300,000,000 5.80% 4.90% 0.14% BB $ 310,404,000 103.47% 18,000,000 0.135% 0.0017055
16 Book Val 1600 sum 4162.54 $ 8,615,188,000 Percent of b 260.16% 3.80% $ 8,924,915,030 103.60% 5.78% $ 498,143,294 4.784% 5.37%
3.153%
Total 10,851,554,000 $ Total $ 11,443,525,517 105.46% 5.62% $ 609,689,488 4.63%
This includes short term.
Source: Standard & Poor's Bond Guide, January 2016, 2015 Yr End Prices Embedded debt rate 5.6185%
Not in bond guide: JetBlue , United Continental Holdings, Allegiant Travel. Data collected from FINRA website. W eighted average yield to maturity 4.6273%
Debt service / Market value 5.3278%
PASSENGER AIRLINES
Instructions: Data entered on this page will flow to the applicable worksheets.
Value Line February 2016 Yahoo Value Line Value Line Value LineValue LineValue Line Value Line Value Line Value Line Value Line Value Line
The harmonic mean is the preferable method for averaging multiples, such as the price/earning ratio, in which price is in the numerator. If these ratios are averaged using an arithmetic mean (a common error),
high data points are given greater weights than low data points.
The harmonic mean, on the other hand, gives equal weight to each data point
Morning Star Data ending 2015
13
Projected (Next Year)
%% All Average Average% Return on Gross % Net Sharehold Relative Net Net
RetainedReturn Dividend Revenues Cash Load Long-Term Bk Common Annual Annual Operating Income Shareholders Earning Equipment Profit ers' Dividend P/E Operating Profit
toon Total s to Net Per Sh Flow Factor Debt Value Shares P/E Dividend Margin Tax Rate ' Equity s per share Margin Equity s Ratio Revenues ($Mil)
CommonCapital Profits Ratio Yield
VL V L VL V L VL VL VL VL VL VL VL VL VL VL VL VL VL VL VL VL VL VL