Question

Delta Air Lines, Inc., and Southwest Airlines Co. are two publicly traded airline companies. They reported the following in their financial statements (in millions of dollars, except per-share amounts and stock prices): Net income Total stockholders' equity Earnings per share Stock price when annual results reported Delta 2016 2015 $ 4,373 $ 4,526 12,287 10,850 5.82 5.68 Southwest 2016 2015 $2,244 $2,181 8,441 7,358 3.58 3.30 49.51 46.10 53.23 35.69 Required: 1-a. Compute the 2016 ROE for each company. Express ROE as a percentage. TIP: Remember that the bottom of the ROE ratio uses the average stockholders' equity. 1-b. Which company appears to generate greater returns on stockholders' equity in 2016? 2-a. Compute the 2016 P/E ratio for each company. 2-b. Which company do investors appear to value more?

Answer 1

1-a) computatton of Roe-for each company Por the p ear 2016 too ROE Net Gncome Average stotholders equuity Southwest 22LpLp Delta 4372 Net Gnoome Average steetholdes 11568 5 equity 89 S 28 41 2244 x Loo 7899 5 34.8000 ROE 4373 $115685 Delta for Average stoatholdevs equity 12 281 t CO850 2 t1568.5 Sourthest 8444 258 2 $18995 1-b) Company Delta appeavs to generate greater retcn on stockholdevs equity Gn 2016

2-9) computation af pE vatio Por each company Por the Year 2016 artet price per chave P.E Vatio Earfng per chare sourtheoest 523 2.58 Delta 49 51 582 3arket psice eaAng Per share 8.51 PE Vatio 53.23 3'58 $582 2-6) cmpany Southoest appear t valeee stnce t has ighest pe vatio nore than belta