Additional pages in finance

1. Please describe the methodological approach that should be used to value AirThread (should Ms. Zhang use WACC, APV, or some combination thereof). How should the cash flows be valued for 2008 through 2012? How should the terminal value or going concern be estimated? How should the nonoperating investments in equity affiliates be accounted for in the valuation? [Hint: it may be possible to use more than one technique simultaneously]

2. What discount rate should Ms. Zhang use for un-levered FCF for 2008 through 2012? Is this the same discount rate that should be used to value the terminal value? Why or why not

3. Develop an estimate of the long-term growth rate that should be used to estimate AirThread’s terminal value. Using your estimate of long-term growth, what is the present value of the AirThread’s going concern value?

4. What is the total value of AirThread before considering any synergies? What is the value of AirThread, assuming Ms. Zhang’s estimates for synergies are accurate?

Question 1

Considering the case analysis, AirThread communication will be acquired by American Cable Communication. They will however accrue a huge amount of liabilities in form of debts which will attract a long-term repayment scheme, this is a normal event in the industry however. Considering the Leverage Buyout approach, American Cable will have increased capital. This form of event will point towards a purchase financed by a debt. With such a scenario, the only possible way of determining the Value of Airthread will involve the use of WACC. This will call for Ms. Zhang to employ WACC and APV to estimate the target.

The APV value is important in evaluating the value of the target. It will be employed by issuing discount values to the free cash flow of 2008 to 2012.

Another significant use of WACC is to determine the terminal value of the target when ATC increases at a constant rate for the perpetual. In this scenario, an assumption of the growth is considered.

Question 2.

It can be observed and concluded that ACC will pay down the debt slowly over time. The debt bears a depreciating value, in this regard, APV method will be best suited for making calculations.

The International, Tax Shield is calculated using the expression: VL=VU+PV

Thus, it is advisable to independently determine the two variables by employing the different discount rates. Here, rA is the discount rate used to find the desired parameters and VU and rD. Are discount rate used to calculate PV (Int. Tax Shields).

It is not advisable for Ms. Zhang to use same discount values for the terminal values. . The discount rate for the terminal value should make use of WACC. The foundation is that ATC will not preserve its debt to equity ratio during 2008 to 2012, this explains why it is not necessary employing WACC as the discount rate. Beyond 2012, we assume the company will propagate with a constant rate which means it will grow in a perpetual design.

Thus:

Question 3.

Develop an estimate of the long-term growth rate that should be used to estimate AirThread’s terminal value. Using your estimate of long-term growth, what is the present value of the AirThread’s going concern value?

If we carefully consider the case, it is evident that the growth rate of the company would be way below the growth rate of Marco Economy in totality. In this case, an assumption is considered to see the growth rate of ATC to be equivalent to 30 years, thus 1981-2011, real GDP growth rate of United States.

Average nominal GDP growth rate= 4.11%.

30-year inflation rate=0.96%. If we use the formulae:

(1+nominal growth rate)= (1+ real growth rate) (1+inflation rate), real growth rate=3.12%.

Therefore, the growth rate of ATC equals 3.12%.

Question 4.

What is the total value of AirThread before considering any synergies? What is the value of AirThread, assuming Ms. Zhang’s estimates for synergies are accurate?

Considering the years 2008-2012, we employ the APV to calculate PV of the cash flow for this duration as shown below.

VL=VU+PV (Int. Tax Shields) = 1295.877+284.783=1580.66 Million

For the years after 2012, we use WACC to value the perpetual future cash flow.

According the market multiples in Exhibit 7, D/ (D+E) =28.1%, E/ (D+E) =71.9%.

Finally, we calculate the Total Value of ATC:

VL + Terminal Value=1580.66+8734.33 =10314.99 Million=10.31499 Billion