UAL valuation and "recovery plan" scenariosa) 5% bankruptcy probability: value of stock $0b) 60% probability for 10% cost reduction plan: value of stock $21 c) 30% probability for 15% cost reduction plan: value of stock $30d) 5% probability for 20% cost reduction plan: value of stock $40 Expected stock value = (.05x0) + (.60x$21) + (.30x$30) + (.05x40) = $23.60Present value (discounted) = $20 ($23.60/1.17) Present value of the stock under a 10% cost reduction plan: $18 The discount rate (required rate of return) would decrease as leverage ratios improve under a cost reduction plan and once labor issues are resolved. Using current earnings (first call) assumptions and a 10% cross-the-board reduction in total labor costs, equity (retained earnings) would increase by approximately $1 billion over the 2002 through 2005 forecast period. Key model assumptions * Cost of equity capital for first (4 yrs) stage: 17% * Constant growth stage (terminal value) based on a .016 net profit margin and15% discount rate * 116.5 million shares outstanding* across-the-board labor cost reduction program includes work rule changes. * GDP estimates: 3% to 3.5% in 2003, 2004, 2005 * Revenues increase 12% in 2002 over 2001 and then 5% thereafter* Revenues do not recovery to 2000 levels until 2005 * net margins for a 10% plan: 2002: -2.5%, 2003: +1.7%, 2004: +3.2%* net income for a 10% plan: 2002: -$400m, 2003: $300m, 2004: $$600*forecast market value for a 10% plan: $2.4 billion *company destroys capital under the 10% when all sources of capital are included* recovery plan in place through 2005. Summary: The "10% recovery plan" scenario suggest that the current stock price is undervalued by at least 15%. 12 month target price: $20 to $25.
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