Market risk premium (Delta Airlines and American Airlines, 6.

06%)

The market risk premium of Delta Airlines and American Airlines which our group used in our valuation,
are both equal to 6.06% since our company, Delta Airlines and American Airlines have similar business
operations and industry. According to Bloomberg Terminal and Finra Morning Star, the 20-years market
return of S&P 500 and 20-years treasury bond are 7.5% and 1.995%. The reason we picked 20-years’
time range was this time range could cover all the changes of the markets in different economic
statutes. In order to calculate the market risk premium which, we used in our valuation, our group
averaged three market risk premiums from our group’s calculation as well as from Damodaran’s
research and Blomberg Terminal. With 7.5% of market return and 1.995% of risk-free rate, our group
market risk premium was 5.51%. Damodaran’s research showed the US market risk premium in 2019
was 5.96% and Bloomberg showed market risk premium of 6.71%. All three market risk premium above
are reasonable and they are very closed to each other, thus averaging them to find market risk premium
of Delta and American Airlines is the best solution.

Cost of Equity (Delta Airlines: 8.6%, American Airlines: 11.75%)

The cost of equity of Delta Airlines and American Airlines are 8.6% and 11.75% according on our group
calculation. The cost of equity of both airlines was calculated based on CAPM formula with the
information (risk free rate, market risk premium and beta) mentioned above.

Cost of Debt After Tax (Delta Airlines: 2.33%, American Airlines: 4.02%)

The cost of debt after tax of Delta Airlines and American Airlines are 2.33% and 4.02%, respectively. In
order to calculate the cost of debt of two airlines, our groups used the income statement from 10K
report of both companies to find the effective tax rates. About the pre-tax cost of debt of both
companies, this information was acquired from Finra Morning Start by averaging all the pre-tax cost of
long-term debt of both companies. The after-tax cost of debt of Delta is 1.69% less than that of
American Airlines, this difference is reasonable since the credit grade of Delta Airlines according
Standard & Poor is BBB+ which is higher than BBB of American Airlines.

Weighted Average Cost of Capital (Delta Airlines: 5.9%, American Airlines: 5.33%)

Although American Airlines shows it is risker than Delta Airlines in order to invest in since its beta, cost
of equity, and cost of debt are higher than Delta Airlines, the weighted cost of capital of American
Airlines is less than that of Delta Airlines, 5.33% versus 5.9%. The reason for this is due to the weights of
financing debt and weight financing equity, American Airlines’ financing debt which includes interest-
bearing debts, took 83.1% of American Airlines’ capital. Meanwhile, that percentage of Delta Airlines is
only 43.03%. With higher weight of financing debt, American Airline has higher tax-shield than Delta
Airlines which might be also a small reason why American Airlines’ WACC is less than Delta Airlines’
WACC along with “difference in weights of financing debt and equity” reason. In the future, the WACCs
of Delta and American Airlines are expected not to change in the future due to the recession is coming
soon and those airlines want to avoid the financial risks by maintaining the financing equity to financing
debt or reducing the debt levels.