Airtread Case Writeup

1298 Words Jan 26th, 2013 6 Pages
1. Ms. Zhang wanted to keep things simple by assuming a stock purchase using the maximum amount of leverage available to conduct the merger, and she assumed that the acquisition debt could consist of a single tranche amortizing monthly over 10 years, but with bullet payment to bring AirThread’s leverage ratios in line with those of the 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 …show more content…
(in million dollar) | 2008 | 2009 | 2010 | 2011 | 2012 | Free Cash Flow | 227.07 | 347.38 | 319.73 | 326.04 | 322.24 | Interest Tax Shield | 80 | 73 | 66 | 59 | 56 |

4. A company’s long-term growth rate is a function of return on capital and reinvestment rate, and should not exceed long-term macro economy growth rate. The return on capital represents the investment return and the reinvestment rate represents the proportional amount of capital reinvested to fulfill future growth of the company. So a better to estimate the long term growth rate is to return on capital multiplied by reinvestment rate. So, g=return on capital×reinvestment rate. A detailed disaggregation of this function can be fond in Function 1 in appendix.
We need the long term growth rate of AirThread when its capital structure is in line with the industry and reflect the most recent performance after the merger event. So it is better to estimate the long term growth rate by using the 2012 year end projected financial statements. As we have computed the Δ NWC in Q3 and got other necessary inputs from the exhibits in case material, the only unknown data is the Total Assets of 2012. To project this number in 2012, we need to use the formula of Asset Turnover ratio. Asset Turnover ratio = Total revenue/ Total asset
The total revenue of 2012, combining the Service Revenue and Equipment Revenue of 2012

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