Generally Accepted Accounting Principles and Non-operating Value
Valuation of AirThread Connections
Group 7
(Shaojin Ding/ Jin Wang/ Wenqi Gu/
Shijia Wu/ Tongtong Yin/ Canran Xie)
Given the background of ACC and AirThread, do you think the acquisition is a good idea? Briefly explain your answer.
Yes. First, American Cable Communication (ACC) and AirThread could help each other compete in the industry that was moving more and more bundled service offerings. Second, the acquisition could help both companies expand into the business market. Third, ACC was in a unique position to add value to AirThread’s operations because the acquisition could save AirThread more than 20% in backhaul costs. The reasons above make us believe that the synergy is positive and the acquisition is a good idea.
Based on the projected cash flow information provided in the case, what is the stand- alone value of AirThread? Show the cash flow forecasts, discount rate, and your valuation model. (Hint: pay attention to the Working Capital Assumptions provided in Ex 1. For example, Accounts Receivable 41.67× means on average it takes 41.67 days to receive payment from customers. )
According to Jennifer Zhang’s analysis, we divide the stand-alone value of AirThread into two parts—operating value and non-operating value-- and then add the two parts together to get the result. First, when we calculate the operating value, we use the DCF model. We pick the risk-free rate from historical annual returns investments on T-bonds from 1928 to 2007 and use the geometric average, which is 5.4%, and collect the 5% equity market risk premium from the casebook. We assume the equity as the average equity of the industry, which is 0.96 (but we exclude one company that is Agile Connections, because the net income of this company is negative), and then use the Harris and Pringle Method to levered (=1.467) because we assume that the D/E ratio (=52.5%) does not change. According to the CAPM Model, we get the cost of equity (=13%). We get the
Group 7
(Shaojin Ding/ Jin Wang/ Wenqi Gu/
Shijia Wu/ Tongtong Yin/ Canran Xie)
Given the background of ACC and AirThread, do you think the acquisition is a good idea? Briefly explain your answer.
Yes. First, American Cable Communication (ACC) and AirThread could help each other compete in the industry that was moving more and more bundled service offerings. Second, the acquisition could help both companies expand into the business market. Third, ACC was in a unique position to add value to AirThread’s operations because the acquisition could save AirThread more than 20% in backhaul costs. The reasons above make us believe that the synergy is positive and the acquisition is a good idea.
Based on the projected cash flow information provided in the case, what is the stand- alone value of AirThread? Show the cash flow forecasts, discount rate, and your valuation model. (Hint: pay attention to the Working Capital Assumptions provided in Ex 1. For example, Accounts Receivable 41.67× means on average it takes 41.67 days to receive payment from customers. )
According to Jennifer Zhang’s analysis, we divide the stand-alone value of AirThread into two parts—operating value and non-operating value-- and then add the two parts together to get the result. First, when we calculate the operating value, we use the DCF model. We pick the risk-free rate from historical annual returns investments on T-bonds from 1928 to 2007 and use the geometric average, which is 5.4%, and collect the 5% equity market risk premium from the casebook. We assume the equity as the average equity of the industry, which is 0.96 (but we exclude one company that is Agile Connections, because the net income of this company is negative), and then use the Harris and Pringle Method to levered (=1.467) because we assume that the D/E ratio (=52.5%) does not change. According to the CAPM Model, we get the cost of equity (=13%). We get the