...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 & Administrative EBITDA Depreciation...
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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 value...
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...effectively. The increasing demand of cable companies to acquire economies of scale led executives to conclude that in the future, only a few large network providers would survive in the industry. The company believes that the only way to achieve customer growth amidst the rapid increase in costs to acquire new customers and high penetration rates in video and internet is through additional acquisitions. Currently, ACC is 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...
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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 average...
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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 assigned...
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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 calculation...
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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 your...
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...Session 2 Week 2 - FNCE 90062 Capstone Studies in Finance Session 2 Comparator Analysis “Comps” An opinion of value • A valuation is a well-founded opinion of value. It should be based on market evidence, but it is not a market result itself. • In some cases, the asset is not traded in an active market or exchange. e.g., privately held companies, real estate. Here, the concept of value may be different, depending on the type of valuation. (e.g., valuation for tax vs valuation for listing) • In other cases, the asset is traded in an active market or exchange. Here, you must provide a reason why the market value does to represent the ‘correct value’ for the purchaser. e.g., listed companies Valuation methods Method Comparable Companies DCF Cash Flows Accounting Risk Adjustment Prevailing market evidence Expected CFs Expected CFs RADR Separate RADR for different classes of CFs Separate RADR for different risk classes of CFs Risk free Complexity Adjusted DCF Sum of the Parts Expected CFs Certainty Equivalence Risk adjusted Use Steps in Comparable Company Analysis 1. Select Universe of Comparable Companies 2. Locate Necessary Financial Information 3. Determine Key Statistics, Ratios and Trading Multiples 4. Benchmark the Comparable Companies 5. Determine Valuations Step 1: Select Universe of Comparable Companies • What is a comparable company? You are looking for a company that similar to the company being...
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...GOODMAN INSTITUTE OF INVESTMENT MANAGEMENT John Molson School of Business GIIM 618 SEMINAR IN CORPORATE FINANCE Fall 2012 Saturday 12:30pm – 3:00pm September 8 – December 8, 2012 Instructor: Loretta Hung Office: MB-12.231 Tel.: (514) 848-2424 ext. 5114 E-mail: lorethun@jmsb.concordia.ca Please contact professor to confirm appointments. COURSE OBJECTIVES The course offers an in-depth coverage of Study Session 8 and 9 in preparation for CFA Level II examination. In addition, the course is designed to develop your skills in solving various financial problems through assessment of cases. TEXTBOOKS “Corporate Finance,” CFA© Program Curriculum 2013, Level II, Volume 3 Reading 25: Capital Budgeting Reading 26: Capital Structure Reading 27: Dividends and Share Repurchases: Analysis Reading 28: Corporate Governance Reading 29: Mergers and Acquisitions Cases - binder EVALUATION PROCEDURE Two In-Class Tests Case Analysis & Presentation Written Case Report Case Rebuttal & Class Contribution Final Exam Total CLASS TESTS AND FINAL EXAM Class tests will take about 75 minutes each and the final exam will be 2-1/2 hours long. The format for testing will include multiple-choice item sets and/or multiple-choice questions. CASE ANALYSIS & PRESENTATION The classes in Montreal and Toronto will divide themselves into four and two groups, respectively. The classes themselves can decide who is in which group. The Groups are to be established by September 10, 2012 and the Group Coordinator is to...
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