compares the CCF method to the Adjusted Present Value (APV) method and provides consistent leverage adjustment formulas for both methods. The most common technique for valuing risky cash flows is the Free Cash Flow (FCF) method. In that method‚ interest tax shields are excluded from the FCFs and the tax deductibility of interest is treated as a decrease in the cost of capital using the after-tax weighted average cost of capital (WACC). Because the WACC is affected by changes in capital structure‚ the
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VALUATION TECHNIQUES Vault Guide to Finance Interviews Valuation Techniques How Much is it Worth? Imagine yourself as the CEO of a publicly traded company that makes widgets. You’ve had a highly successful business so far and want to sell the company to anyone interested in buying it. How do you know how much to sell it for? Likewise‚ consider the Bank of America acquisition of Fleet. How did B of A decide how much it should pay to buy Fleet? For starters‚ you should understand that the value
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1. The cash flows (without synergy) were taken as provided for 5 years along with adjustment for Net working capital changes. 2. WACC was calculated for various D/V ratios 3. Terminal Value of the firm was determined using P/E Multiple of 19.1 4. Valuation done for the cash flows and terminal value at a discount rate corresponding to industry average D/V Ratio 5. APV determined using the unlevered equity discount rate and the debt rate. Interest tax shield considered accordingly 6. Steps 1-5 repeated
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1) Why is Flagstar in financial distress? When possible‚ back your claims with data. Signs of financial distress • The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1‚ we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at
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1. WHY IS PARAMOUNT A TAKEOVER TARGET? Paramount is a potential merger target to Viacom and QVC for a few key reasons outlined below: Paramount & Viacom: (1) Synergy creation: The businesses of both companies are famous and highly complementary to each other. (2) Cost reduction: Paramount & Viacom both have economies of scale and are doing business in a similar industry. (3) Addition of enhanced and complementary distribution capabilities‚ which will significantly increase revenue. (4)
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Paramount Communications Inc. Question 1 Paramount is a takeover target because other firms see synergy value associated with combining Paramount’s assets and operations with their own. Specifically‚ Paramount has several assets that complement other media companies. Value in the media is generated through several different channels. As a media company‚ Paramount has a presence in most of the entertainment sectors (see Exhibit 2). There seems to be a drive toward consolidation and several industry
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2005 E 2006 E All Equity Financed Terminal Value (TV) 4812.50 Discounted CFs (1‚500) (96.72) 4.47 97.24 174.62 237.72 PV of TV 2311.15 NPV 1‚228.49 Scenario 2: Assuming $750‚000 fixed debt and perpetual. Under this scenario‚ the APV method is useful and appropriate to use because the debt of the project is fixed
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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‚
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A. METHODOLOGIES: 1. The Weighted Average Cost of Capital (WACC) Approach: This method offers a wide range of advantages. For instance‚ the Capital Assets Pricing Model (CAPM) is employed in the calculation of the Cost of Equity. Thus‚ the discounted rate of 7.58 percent used in figure 1.12 Appendix is likely to be precise. The total value of the firm is $4.73 billion. Nonetheless‚ in view of the probabilities of forecasting errors in the estimation of cash flows‚ the degree of precision does
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interest tax shield=750000*6.8%*40%=$20‚400 In this case‚ we assume the risk of the interest tax shield equals the risk of the debt. rTS=rD=6.8% PVTax Shield=204006.8%=$300‚000 APV=1228485+300000=$1‚528‚485 3. We has known that rU=15.8%‚ rD=6.8%‚DV=25%‚EV=75%‚ through the formula rU=rDDV+rEEV ‚ we can get: rE=18.8% WACC=rDDV1-Tc+rEEV=6.8%*25%*1-40%+18.8%*75%=15.12% The terminal value of project at the end of 2006: TV2006=FCF2007WACC-g=FCF2006*1.05WACC-g=5197500.1012=$5‚135‚870 Vproject=-1500000+-1120001
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