Airthreads

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 financing.

We would project free cash flows for the next five years, subtract tax, add back deprecation, and subtract CAPEX and changes in NWC. The result would be the unlevered cash flows which would be discounted back at the discount rate (WACC).

Terminal value would be estimated using the terminal growth rate. Since this is a private company, it would be a better measure of the company’s terminal value. A multiple method is a market approach that takes into account a market approach (public companies) which might not be appropriate in this case since this is not a public company.

Since we will not be able to project cash flows for the affiliates, it would make sense to use the market approach for valuing the investments in affiliates. Moreover, the dividend received would not be equal to the share of the net income. All this results in using the market multiple approach. The historical P/E multiple 19.1x will be used for this calculation.

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

The discount rate for the FCF and Terminal Value should be different because the capital structure is not the same at the beginning of the five year period...