Airthread Connections

* She is considering the cash flow paid to all the equity or debt holders. So she cannot use the equity cost of capital.

h) How do free cash flows and weighted average cost of capital interact to determine a firm’s value?

First, we need to find the required rate of return (WACC) to calculate the discounted cash inflow so that we can evaluate the longwood woodyard project more accurately.

Since this project is a going concern, the levered terminal and present values are calculated using the weight average cost of capital (WACC) as the discount rate, which we calculate to be 16.17%.

When new equity is to be raised, then there will be floatation cost. The net price will be $25-$2 the floatation cost = $23.

Now assume Falcon’s plant and equipment is overvalued by $5,000,000. How much goodwill does Peregrine report?

First of all, we can estimated what price is competitors are able to pay to acquire AirThread Connections by creating the base-case valuation of AirThread Connections. On the hands, by valuing the upside valuation of AirThread Connections, the estimation of synergies and the suitability of ATC strategic with ACC operations. The steps in valuation of base-case Valuation of AirThread Connections and Upside Valuation of AirThread Connections are identical, the only different is Upside valuation of Airthread Connections included the impact of synergies. The first steps in valuation is to estimate the free cash flows in it's present value. Next is to predict the AirThread Connections operations' terminal value on a going concern basis and treat the company as a perpetuity and then follow by determine the interest tax subsidy in present value. After that by using the equity in earnings of affiliates and Price Earning ratio to calculate the non-operating investments in equity affiliates. The final steps is to calculate the enterprise value in the final valuation and terminal value calculation after valuing the total operating assets in its present value.

The Net Present Value of the additional cash flows due to these two areas of synergy is comes to $461.6 million. The valuation of ATC with the effect of synergy rises to $13,296.39 million or rounded to $13.30 billion. SENSITIVITY ANALYSIS (Indicates in worksheet “Sensitivity Analysis” in separate sheet) Private Company Discount: The discount related to illiquidity of private investments which diminishes as revenue of company increases. This discount bounded on lower end by cost of going public equal to 10%. Growth Rate (g): The growth rates which are used in terminal value calculation can have a tremendous effect on terminal value. To illustrate, 1.5% to 2.5% Δ in growth rate has a $3.000 B to $7.000 B effect. Potential Synergy: The increase in revenue from bundled service offerings (BODIE & MERTON, 2000) could be higher or lower than expected. To illustrate, a 20% change in revenue has a $1.000 B effect on Air Thread’s value. RECOMMENDATION AND CONCLUSION Through thoughtful valuation, it is imperative to note that, the Air Thread Connection cash flow tends to increase from the year 2008 to 2012 which indicates the financial stability of the company. Since the stability and its internal systems and policies seem to

(Note: retained earnings information is irrelevant here) Part b. Total market value = debt + pref. equity + Common equity = 1,147,200 + 1,250,000 + 2,500,000 = $4,897,200

Calculate the unlevered firm value as the present value of the unlevered horizon value and the FCFs at the unlevered cost of equity.

WACC = Cost of Equity x (Equity/Debt +Equity) + Cost of Debt x (Debt/(Debt + Equity)) x (1 – Tax Rate)

After 5-years, a bullet payment to discharge the debt will be made, and hence the terminal value can be estimated using WACC. The terminal value is 4 286,4.

Palm & Sun's (PS) free cash flows are expected to be $200 million next year and $488 million two years from now.  After that, free cash flows are expected to grow at a constant rate of 3% per year forever.  P&S’s WACC is 11%, its cost of equity is 14% and its cost of debt is 9.5%.  They have $400 million of debt and $78 million in cash on their balance sheet.  Use the discounted cash flow model to find P&S’s current equity value (rounded to the nearest million dollars).

I do not agree with many of the assumptions made in the case to calculate the value above (Ex – use of $22 * number of outstanding shares as the value for Equity for WACC calculations for #7)

Finally, we come up with the value for the operating after-tax operating cash flows for the next three years and the terminal value. We calculate the present value of these cash flows by discounting by the unlevered cost of capital, rU given as 8.7%, which gives us a value of the unlevered firm of ca. $566m.