This case can be utilized as a capstone valuation exercise for year one MBA students in a rudimentary finance course. A senior partner in the business expansion team at American Cable Communications, one of the biggest cable organizations in the U.S., must set up a preparatory valuation for taking over Air Thread Connections, a local cellular supplier. The takeover would allow American Cable an avenue for engaging with wireless expertise and technology as well as the wireless band. It would also make the company capable of offering appealing service packages, including wireless, which lacks in the company’s present portfolio. Students will be made familiar with the fundamental learning related to valuation, which will include DCF (discounted cash flow) using APV (adjusted present value) and WACC (weighted average cost of capital). they will be required to decide on the optimal option for circumstances that involve a capital structure that may be changing or may be steady. Students will be required to consider the influence of steady debt versus the D/V (debt to-value ratio) in assessing betas and the costs of capital. Also, students evaluate the impact of non-operating assets on valuation calculations. Further, course facilitators can add the task for students to take into account the individual tax shortcoming of debt and the advantage that American Cable hopes to accomplish after the takeover.
Future Cash Flows Projections,
Calculation of Working Capital,
Discount Rate & Growth Rate Calculations,
Calculation ROA through CAPM,
Calculating Beta from Comparable Companies' Information,
Calculating Long-term Growth Rate,
Valuing the Company using APV Approach,
Adjusting Company Value for Synergies and Liquidity
1. Please describe the methodological approach that should be used to value AirThread (should Ms. Zhang use WACC, APV, CCF, or some combination thereof). How should the cash flows be valued for 2008 – 2012? How should the terminal or going concern value be estimated? How should the nonoperating investments in equity affil-iates be accounted for in the valuation? [Hint: it may be possible to use more than one technique simultaneously.
2. What discount rate should Ms. Zhang use for the un-levered FCF for 2008 through 2012? Is this the same discount rate that should be used to value the terminal value? Why or why not?
3. Develop an estimate of the long-term growth rate that should be used to estimate AirThread’s terminal value. Using your estimate of long-term growth, what is the present value of AirThread’s going concern value?
4. What is the total value of AirThread before considering any synergies? What is the value of AirThread, assuming Ms. Zhang’s estimates for synergies are accurate? Should the value of the tax shields reflect that personal tax disadvantage of interest income to ordinary debt holders? If so, what is the personal income tax disadvantage of debt?