Generally Accepted Accounting Principles and Capital Assumption Factor
AirThread
Valuation of AirThread
This case deals with the valuation of AirThread Connections Business (ATC) from the perspective of its potential acquirer, American Cable Communication (ACC). ACC is a large cable operator which serves the video, internet and landline telephony needs of millions of users across America. However it is recently looking to acquire ATC which is one of the largest wireless companies in the United States. This acquisition will bring with it certain synergies that both can benefit from, which is primarily the reason behind the valuation requirements of AirThread.
Methodological approach to value AirThread
American Cable Communication is interested in raising significant capital following the Leveraged Buyout (LBO) approach. This implies that the purchase is financed primarily through debt. As this means that ACC will not be maintaining their current debt to equity ratio therefore relying on the WACC method to calculate the value of AirThread would not be appropriate. For the valuation of AirThread in this case analysis we are using APV. However we will still need to calculate the WACC for the purposes of the APV valuation.
Valuing AirThread’s Cash Flows
Given the above breakdown for the Net Income of AirThread over the 2008-2012 period and the
working capital assumptions as outlined above (That are based on a 360-day year), we can calculate the Net Working Capital (NWC) and the ΔNWC.
To understand how we got to these numbers for the 2008-12 period let us look at the calculations for the 2008 period.
Accounts Receivable (2008) = Total Revenue (2008) * Working Capital Assumption Factor (2008) / Number of Working Days = 4509.1 * 41.67 / 360 = 521.928
Days Sales Equip. Rev. (2008) = Equipment Sales (2008) * Working Capital Assumption Factor (2008)/ Number of Working Days = 314.8 * 154.36 / 360 = 134.979
Prepaid Expenses (2008) = (System Operating Expenses + COGS + SG&A) * Working Capital Assumption Factor
Valuation of AirThread
This case deals with the valuation of AirThread Connections Business (ATC) from the perspective of its potential acquirer, American Cable Communication (ACC). ACC is a large cable operator which serves the video, internet and landline telephony needs of millions of users across America. However it is recently looking to acquire ATC which is one of the largest wireless companies in the United States. This acquisition will bring with it certain synergies that both can benefit from, which is primarily the reason behind the valuation requirements of AirThread.
Methodological approach to value AirThread
American Cable Communication is interested in raising significant capital following the Leveraged Buyout (LBO) approach. This implies that the purchase is financed primarily through debt. As this means that ACC will not be maintaining their current debt to equity ratio therefore relying on the WACC method to calculate the value of AirThread would not be appropriate. For the valuation of AirThread in this case analysis we are using APV. However we will still need to calculate the WACC for the purposes of the APV valuation.
Valuing AirThread’s Cash Flows
Given the above breakdown for the Net Income of AirThread over the 2008-2012 period and the
working capital assumptions as outlined above (That are based on a 360-day year), we can calculate the Net Working Capital (NWC) and the ΔNWC.
To understand how we got to these numbers for the 2008-12 period let us look at the calculations for the 2008 period.
Accounts Receivable (2008) = Total Revenue (2008) * Working Capital Assumption Factor (2008) / Number of Working Days = 4509.1 * 41.67 / 360 = 521.928
Days Sales Equip. Rev. (2008) = Equipment Sales (2008) * Working Capital Assumption Factor (2008)/ Number of Working Days = 314.8 * 154.36 / 360 = 134.979
Prepaid Expenses (2008) = (System Operating Expenses + COGS + SG&A) * Working Capital Assumption Factor