Airthread

Airthreads

The Valuation of AirThread Connections

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 CAPM, the unlevered rate of return R(a) = R(f) + unlevered beta * ERP...