Airthreads Essay

841 words - 4 pages

Midterm case: Valuation of AirThread Connections
1) Describe the approach that should be used to value Air Thread – WAAC, APV, other or some combination? How should cash flows for 2008-2012 be valued? How should the terminal value or going concern be estimated? How should non-operating investments in equity affiliates be accounted for in the valuation? (It may be possible to use more than one technique simultaneously.

APV valuation would probably be a better approach because the capital structure is changing each year. WACC assumes a stable capital structure every year. Therefore, it would be better to use APV since that will separate unlevered cash flows and the value of ...view middle of the document...

Therefore, two different discount rates shall be used. The WACC for FCF uses a 50% debt/equity ratio assumption as said in the case. The WACC for Terminal Value uses a 40.1% debt/equity ratio since the case says the leverage ratio will be at industry levels by the end of the five years. The 40.1% comes from the average debt/equity ratio of the comparables. The following tables show the math behind the discount rate:

WACC for FCF:

WACC for Terminal Value:

3) What is the long term growth rate that should be used to estimate Air Thread’s terminal value? Using your estimate of the long term growth, what is the present value of the Air Thread going concern value?

The long-term growth rate is going to be the rate based on the return on capital and the reinvestment rate. The calculation for the growth rate is below:

The Terminal Value as a result of this growth rate and discount rate shown above is:

4) What is the total value of Air Thread before considering any synergies? What is the value assuming Ms. Zhang’s estimates for synergies are correct? Should the value of the tax benefits reflect the personal tax advantage of interest income to ordinary debt holders? If so, what is the personal income tax advantage of the debt?

First net working capital was projected for the five years using the multiples given...

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