Valuation of AirThread Connections By: Chris Cruz Zach Hatoum Michael Peña Kevin Reilly Ali Zaidi American Cable Communications (ACC) 48.5 million homes had ACC cable passing through 24.1 million video subscribers 13.2 million high speed internet 4.6 million landline telephone Expected consolidated revenue of $30.9 billion (2007) Expected Net Income of $2.6 billion (2007) AirThread Connections One of the largest regional wireless companies in the United States Service more than
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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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1 – Methodological Approach In this case‚ American CC – the intended acquirer of AirThread Connections- will use leveraged buyout (LBO) model‚ which means the company will finance the acquisition through bank loan or some other borrowing methods. Hence‚ the debt-to-equity ratio will change in time. Since we will need to estimate the discount rate any time the capital structure changes‚ neither WACC nor APV would be reliable alone. Therefore‚ Ms. Zhang should use the combination of WACC and APV
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working Capital. These will all facilitate calculation of the Unleveraged Cash Flow (UFCF) from 2012 which stable increases. Consider the computations referencing income statement on separate sheet. TERMINAL VALUE Furthermore terminal value as a key valuation factor which can be calculated in two ways namely perpetuity model and market value of comparable companies. The perpetuity model involves use of terminal year free cash flow (FCF)‚ growth of terminal year cash flow over the previous year and WACC
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1.1. Valuation methodology ACC is using LBO approach for its acquisitions and desires to maintain this acquisition policy for its latest target AirThread Connections (AC). According to this approach‚ AC will be financed significantly by debt which will obviously breach leverage ratios maintained by Air Thread/ACC. ACCs plans to bring down the leverage ratio to industry standards steadily to sustainable levels between the years 2008-2012. Owing to the uneven capital structures between 2008
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2008-2012? The calculation of each cash flow required us to use the projections from AirThread Connections that are given in the Exhibit 1 of the case allowing us to know the Total Revenue‚ EBITDA‚ EBIT and the Unlevered Net Income to be able to compute the Unleveraged Cash Flow (UFCF) from 2008-2012. As well we used Depreciation & Amortization‚ Capital Expenditures and the assumptions established in AirThread Connections Exhibit 1 case to make the adjustments that Working Capital needed to fully
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proposed financing plan‚ describe your approach (qualitatively) to value AirThread. Should Ms. Zhang use WACC‚ APV or some combination thereof? Explain. (2 points) * From the statement of AirThread case‚ we know that American Cable Communication want to raise capital by Leveraged Buyout (LBO) approach. This means ACC will finance money though equity and debt to buy AirThread and pay the debt by the cash flows or assets of AirThread. * In another word‚ it’s a highly levered transaction using a fixed
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BUFUN 750: Valuation in Corporate Finance (DC Campus) Fall‚ 2013 PROFESSOR Liu Yang (lyang@rhsmith.umd.edu) OFFICE VMH 4420 CLASS TIME Wednesdays 2 – 5:35 pm (DC1) OFFICE HOUR Fridays 2:30 – 3:30 pm or by appointment TA Tao Wang (tao.wang@rhsmith.umd.edu) G. Austin Starkweather (astark@rhsmith.umd.edu) TA OFFICE HOUR Mondays 1 – 2pm (VMH 3330G) Fridays 10 – 11am (VMH 4440) COURSE PREREQUISITE COURSE MATERIAL BUSI 640 or equivalent The required text for
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industry. So from 2008 to 2012‚ the D/E ratio of AirThread would change continuously until the bullet payment is paid‚ so we expect to use APV valutation method from 2008 to 2012‚ since it is more efficient to adjust the PV of FCF than to figure out the annual WACC. From 2013‚ the D/E ratio of AirThread would be in line with the industry‚ indicating the company will rebalance its D/E ratio‚ so we expect to use WACC method from then on to value AirThread. 2. Before we calculate the discount rate‚
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APV method is more complicated than two methods mentioned earlier inasmuch as it takes account of unlevered value of the firm and the interest tax shield. Recent complexity of the method notwithstanding‚ APV provides management with an explicit valuation of interest tax shield and an assumption of constant debt-equity ratio is unnecessary. According to figure 1.10‚ the total value of the firm before synergies is $5.02 billion. Nonetheless‚ this method ignores the costs of financial
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