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Words 1970

Pages 8

We can use a combination of APV and WACC approach to value AirThread Connections – using APV for 2008-2012, and using WACC to estimate the terminal value.

Use APV approach to value cash flows from 2008 to 2012

America Cable Company (ACC) should use APV approach to value cash flows from 2008 to 2012. This is because ACC uses classis LBO approach for acquisition where it purchases the target with significant amount of debt, and then in the long run paid the debt to bring down the leverage to industry norms. The goal is to use a tax efficient route and maximize the present value of tax shields, and minimize the amount of up-front equity invested in the deal.

Use WACC approach beyond 2008 to calculate terminal value

ACC will de lever to the industry norms by paying the debt to bring down the leverage. This makes WACC approach suitable for estimating terminal value.

Valuation of AirThread Connections (Without Considering Synergies)

Step 1

Calculate PV of FCF from 2008 to 2012

First we need to estimate the unlevered discount rate, assuming AirThread Connections is all equity financed. Using Exhibit 7, and taking the beta estimates from the comparable firms:

First we un-lever the beta for comparable companies, and take average Debt/ Debt/ Equity Unlevered

Comparable Companies: Value Equity Beta Beta

Universal Mobile 48.0% 92.3% 0.86 0.447

Neuberger Wireless 29.3% 41.4% 0.89 0.629

Agile Connections 19.4% 24.1% 1.17 0.943

Big Country Communications 24.1% 31.7% 0.97 0.736

Rocky Mountain Wireless 30.7% 44.4% 1.13 0.783

Average 30.3% 46.8% 1.00 0.708

* We assume debt beta of zero for comparable companies, assuming their debt to be of high quality

Current Yield on 10 yr US treasury 4.25%

(proxy for risk free rate)

Estimated Unlevered Beta 0.708

Equity Risk Premium(ERP) 5%

So, Using the…...

...ca/publications/graduatecalendar/current/ policiesandprocedures/#academicintegrity) and visit the following web address: http://provost.concordia.ca/academicintegrity/, both of which provide useful information about proper academic conduct. B+ = 75 – 79 B = 70 – 74 B– = 65 – 69 C = 60 – 64 F < 60 3 SYLLABUS SESSION/LOCATION #1 Montreal #2 Toronto #3 Montreal #4 Toronto #5 Montreal #6 Toronto #7 Toronto #8 Montreal #9 Toronto #10 Montreal #11 Toronto #12 Montreal #13 Toronto #14 Montreal DATE Sep 8 Sep 15 Sep 22 Sep 29 Oct 6 Oct 13 Oct 20 Oct 27 Nov 3 Nov 10 Nov 17 Nov 24 Dec 1 Dec 8 CLASS TEST 1 Pepsico Changchun Joint Venture by Montreal Group 1 Cox Communications, Inc., 1999 by Toronto Group 1 The Timken Company by Montreal Group 2 Valuation of AirThread Connections by Toronto Group 2 SZLN: Acquiring PEM by Montreal Group 3 CLASS TEST 2 Dividend Policy at Linear Technology by Montreal Group 4 FINAL EXAM Reading 28: Corporate Governance Reading 27: Dividends and Share Repurchases: Analysis Reading 25: Capital Budgeting CASE / TEST READING Reading 26: Capital Structure Reading 29: Mergers and Acquisitions Depending on class progress, other corporate finance related topics may be added to the syllabus. While a key goal of this course is to prepare you for the CFA exam, there is another important goal of the course: to make you better prepared for the investment business. DISCLAIMER: The professor reserves the right to change or update this outline, and any......

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...discussion and (b) a written report on one of the case studies. At the beginning of term, student groups will be randomly assigned to one of the following two cases: “Valuation of AirThread Connections” or “Dividend Policy at FPL Group, Inc.” Please ﬁnd out which case you have been allocated to and the week in which that case is discussed. In the following I explain which deadlines you have to meet and how eﬀort towards each deadline contributes to your coursework mark: • Deadline 1. You must read up your case material and prepare oral answers to the case questions by the Thursday lecture to which your case discussion is allocated. Groups that have not prepared before the case discussion will suﬀer a coursework mark penalty. The penalty will be 10 points of the coursework mark (e.g., a drop from 60% on your submission to 50% overall). Groups that have fully prepared and present their arguments during the class discussion in a lively and enthusiastic way will receive a 5-point coursework mark uplift (e.g., an increase from 70% to 75%). • Deadline 2. The next deadline is for submission of your complete case report. This must be done on Moodle, by the Thursday one week after the case discussion week. Therefore, the deadlines for submitting the written report are as follows: – Groups assigned to the AirThread case: Thursday 27 March – Groups assigned to the FPL case: Thursday 3 April. Advice on how to write the case report Each group will have to prepare a written report for its......

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...comparable companies until you understand the company you are valuing and the factors influencing the data used in the valuation Step 2. Locate the Necessary Financial Information Key Characteristics of Target Company Business Profile Sector Products and Services Customers and End Markets Financial Profile Size Profitability Growth Profile Distribution Channels Geography Source: RP Return on Investment Credit Profile Step 2. Locate the Necessary Financial Information • Financial information is a product of trading and regulation • Sources of information: – – – – – – Annual report Quarterly or Semi-annual report ASX announcements of material corporate events Analysts reports Credit reports Press releases AirThread Financials Step 2. Locate the Necessary Financial Information • 3: Determine Key Statistics, Ratios and Trading Step Equity Value Multiples Equity Share Value = Price × Fully Diluted Shares Outstanding 4 4 4 4 1 44 4 4 2 3 ITM ITM Basic Shares + + Outstanding Options &W arrants Convertible Securities Step 2. Locate the Necessary Financial Information • Dealing with ITM Options – Supposed the share price is $20 and the firm has issued 5M calls with a strike of $18. These calls are ITM. • TSM Method – Assumes all tranches of in-the-money options and warrants are exercised at their weighted average strike price with the resulting option proceeds used to......

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...AIRTHREAD CONNECTIONS Case Issues 1) Please describe the methodological approach that should be used to value AirThread (should Ms Zhang utilize WACC, ACV, or some combination thereof). How should the cash flows be valued from 2008 through 2012? How should the terminal value or going concern value be estimated? How should the “non-operating investments” in equity affiliates be accounted for in the valuation? Using alternative valuation methods for deriving the “non-operating investment” value is certainly encouraged! 2) What discount rate should Ms Zhang use for the unlevered FCF’s from 2008 through to 2012 (and please defend its use to the fullest). Also, should this discount rate be used to value the terminal value or going concern value? Once again, in detail, “why” or “why not”. 3) Please develop a long-term growth rate that should be used to estimate AirThread’s terminal or going concern value. Using your estimate of AirThread’s long-term growth rate, what is the present value of AirThread’s terminal value? 4) What is the “stand-alone “value of AirThread (sans any synergies). What are the values of each of the synergies (please show in detail). Once the synergies are quantified, please prepare a “synergy waterfall” for AirThread that can ultimately convert to a “tender offer” price. Please defend your argument in support of the “first tender offer”. What range of “tender offer” prices would you have in your “back pocket” (explain in detail). 5) How does......

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...cash flows over the period of five years operations, but since AirThread is a going concern business which means that business operation of AirThread would continue even after the five years, probably till infinity. Meanwhile, the cash flow projection for the future results after five year operation would be more prone to wrong estimations of the revenues and expenses, in addition to this, the future is uncertain and it would be too difficult to calculate the future results of a business because the business is expected to continue for an unlimited future time. Therefore, in order to account for the future cash flows of a going concern business after the projected results we need to calculate a value that would reflect the value of business operation till infinity and to do this a reasonable growth is used to for the estimation of cash flows till infinity, thus, the value of these cash flows till infinity is known as the terminal values. Weighted Average Cost of Capital and Discounting of Terminal Values However, the weighted average cost of capital represents the overall cost of financing the company’s operations and this value represents the returns required by the equity holders and the returns required by the debt holders. In case of AirThread, the cost of equity would be calculated using the average returns offered by the market for an equity share with similar characteristics to the equity share of AirThread, further, the risk free rate is also used in the......

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...considering the idea of buying out AirThread Connections, one of the largest wireless companies in the United States. The acquisition of AirThread will benefit ACC in three different ways. First, ACC and AirThread could help one another sustain a competitive spot in an industry moving increasingly towards bundled services. Second, it would help them expand into the business market whereas before both companies relied heavily on retail and residential customer bases, allowing them to increase network utilization and cost efficiency as a result. Lastly, ACC would be able to add value to AirThread’s operations, saving AirThread over 20% in backhaul costs Introduction The cable industry is a market that is continuously transforming which requires companies to adapt to the new market conditions that only competitors who attain economies of scale will be able to survive in. American Cable Communications strategy is to aggressively purchase smaller companies in the hopes of gaining more customers and increased utilization. They have felt growth through acquisition is necessary due to high penetration rates and high cost of obtaining new customers. The main difficulty for American Cable Communications is its inability to offer a bundled package of services to its customers. This includes wireless services, resulting in very few business customers and long term contracts to increase the stability and reliability of the company’s revenues. AirThread Communications have also been......

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...acquiring economies of scale and scope. American Cable Communication was seeking to acquire AirThread Connections for three reasons. The two companies could help each other become more competitive in an industry that is moving toward bundled package service offerings. The acquisition would help both companies expand into the business market, and lastly American Cable was in a unique position to add value to AirThread’s operations. They could obtain a significant amount of debt financing for an AirThread acquisition. The ATC’s terminal value was calculated by using an estimated growth rate. The assumption of growth rate is made of 2013’s economic growth rate and an estimated inflation rate. The WACC of ACC is 8.05%, The Interest tax shields are 79.6, 73.6, 66, 59.2, 50.8. The unlevered cash flows are 291.54, 342.16, 314.56, 321.42 and 318.64 while the total cash flows are 371.14, 415.76, 380.56, 380.62 and 369.44. To find out WACC, we first calculated cost of debt by using interest rate and tax rate, then calculated cost of equity by using equity beta. I would recommend the acquisition; it is clear that both companies lack what the other one successfully provides. If American Cable Company does not adapt and acquire AirThread Connections, than both companies will find themselves forced out of this highly competitive, constantly changing industry. The overall value of acquiring AirThread Connections is a positive gain for American Cable Company. The estimated enterprise......

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...Valuation of AirThread Connections 1. Methodological Approach to the Valuation a) WACC (Weighted Average Cost of Capital) - When we are supposed to value AirThread Connections with the WACC valuation method we will have to use the following steps: * Determine the unlevered free cash flows of the investment. * Compute the weighted average cost of capital with the following formula: * Compute the value with leverage, VL, by discounting the free cash flows of the investment using the WACC. APV (Adjusted Present Value) – This method involves determining the value of a levered investment using the following steps: * Determine the investment’s value without leverage, VU, by discounting its free cash flows at the unlevered cost of capital, rU: * Determine the present value of the interest tax shield. * Given debt D, on date t, the tax shield on date t + 1 is tc x rD x Dt. * If the debt level varies with the investment’s value or free cash flow, use discount rate rU. (If the debt is predetermined, discount the tax shield at rate Dt. * Add the unlevered value VU to the present value of the interest tax shield to determine the value of the investment with leverage, VL. The APV Formula: b) The cash flows for 2008 through 2012 should be valued like this: Service revenue Plus: Equipment sales Total Revenue Less: System Operating Expenses Less: Cost of Equipment Sold Less: Selling, General &......

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...Given the background of ACC and AirThread, do you think the acquisition is a good idea? Briefly explain your answer. Yes. First, American Cable Communication (ACC) and AirThread could help each other compete in the industry that was moving more and more bundled service offerings. Second, the acquisition could help both companies expand into the business market. Third, ACC was in a unique position to add value to AirThread’s operations because the acquisition could save AirThread more than 20% in backhaul costs. The reasons above make us believe that the synergy is positive and the acquisition is a good idea. Based on the projected cash flow information provided in the case, what is the stand- alone value of AirThread? Show the cash flow forecasts, discount rate, and your valuation model. (Hint: pay attention to the Working Capital Assumptions provided in Ex 1. For example, Accounts Receivable 41.67× means on average it takes 41.67 days to receive payment from customers. ) According to Jennifer Zhang’s analysis, we divide the stand-alone value of AirThread into two parts—operating value and non-operating value-- and then add the two parts together to get the result. First, when we calculate the operating value, we use the DCF model. We pick the risk-free rate from historical annual returns investments on T-bonds from 1928 to 2007 and use the geometric average, which is 5.4%, and collect the 5% equity market risk premium from the casebook. We assume the equity β as the......

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