Airthread Case Solution

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Table 1

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Table 2

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Step 2. PV of tax shield

We also need to reduce the effect of the interest payment, i.e the tax shield from the FCF in order to get the unlevered FCF of AirThread. Below is the table for the interest payment calculation arrived from Debt Repayment Schedule given in the case. (Exhibit 6 to get the yearly interest expense)

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table 4

Total PV of Tax Shield is $ 284.78

Step 3. Present value of unlevered FCFs

How the cash flow valued for 2008 through 2012[pic 12]

By using Exhibit 1 given in the case, the net capital workflows of AirThread without synergy for the given projection years are calculated as shown below: [pic 13]

Table 6

FCF and Cash estimation of AirThread without counting the synergy is given below.

Step4. Terminal values.

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Table 7

Step 5. PV of AirThread's Non-operating assets

In order to calculate the non-operating assets, we could use the Industry average from table 3 which is 19.09 then multiple the equity in earnings for year 2007 which is 90. Then 90*19.09 equal to 1,727.10

Estimation of AirThread’s terminal values:

In order to calculate the long term growth, we need to identify the return on capital (ROC) and reinvested capital.

ROC=NOPAT/ INVESTED CAPITAL (total equity +LTD- minority interest)

Reinvestment rate = (CapEx+ change in NWC-depreciation)

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Table 8

According from the case, the benefit (revenue growth and cost reduction) of Synergies is as below.

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Table 9

Therefore, PV of Air Thread continuation value

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Table 10

*from Exhibit 1

**40% of revenue of operating margin from Exhibit 1

***15.6% of total revenue upon operating margin from exhibit 1

****change in NWC including the benefits of Synergy

Total Value of AirThread’s before and after synergy

Before considering any Synergies, the total value of AirThread is 7,544.4 (continue calculation from table 7)

As the growth rate is 2.9% it resulting the terminal value of WACC is 4,286.7 and the value of non-operating assets is 1,717.1

Value of operating CF: terminal value WACC CF + terminal value (1,717.7 + 1,540.1)

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Table 11

Assuming that the estimation is accurate, the values of the Air Thread will increase to 11,739 with Synergies.

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Table 12

Sensitivity analysis

Growth rate

Growth rate was used to calculate the terminal value which as a result for operating and non-operating values of assets. The changes in growth rate from 1.5% to 2.5% can have a huge impact on the result of values for 2,500 to 6,000. [pic 20]

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Potential revenues increase with Synergies

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Table 14

When there is a 50% probability that revenues will not as expected, either both lower and higher will have impact the values approximately 1,000

Liquidity Discount

When liquidity discount increases value of the firm decreases

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Table 15

Summary and Recommendation

By looking at the valuation and estimation calculation from above, acquiring the Air Thread Synergy will adding values for the American Cable company. As well as the growth rate has a significant effect to the values of the company.