Free Cash Flow and Total Value

* 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.

For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.

What is the terminal value of the final 10 years of the acquisition, as of 2022?

1) Estimate the WACC that is appropriate for discounting the Collinsville plant’s incremental cash flows. You should estimate and present each component of the WACC separately, explaining briefly but clearly what assumptions you are making for each of them. In the same spirit, estimate the appropriate all-equity cost of capital for the APV-based valuation.

Given these approximations, the CAPM model would total the risk-free rate and the market risk premium times beta to arrive at a cost of equity of 9.68%, which reflects the investors’ expected return from investing in shares of the company.

In the first step we analyze the data and calculate the free cash flow from the inception of the project to the foreseeable future.

The next step was to calculate the free cash flows for the eleven-year period. In order to do so, we used to following formula: FCF = EBIT(1-tax) + depreciation - change in NWC – CapEx. From here, we used to WACC of 13.89% previously calculated, in order to find the present value of each FCF.

America Cable Company (ACC) should use APV approach to value cash flows from 2008 to 2012. This is because ACC uses classis LBO approach for acquisition where it purchases the target with significant amount of debt, and then in the long run paid the debt to bring down the leverage to industry norms. The goal is to use a tax efficient route and maximize the present value of tax shields, and minimize the amount of up-front equity invested in the deal.

Most of the corporations calculate WACC for giving investors an estimate on profitability and for being able to weight future projects. We are presented with Boeing current bonds, which constitute the long term debt portion of capital, and with Boeing’s assets which constitute the equity portion of capital. No other weighted entities (such as preferred shares) are considered. The debt/equity ratio would help with the calculation of weights. Boeing would need to earn at least 15.443% return on its investments (including the 7E7 project) in order to maintain the actual share price.

WACC (Weighted Average Cost of Capital) - When we are supposed to value AirThread Connections with the WACC valuation method we will have to use the following steps:

However, it is important to remember that the APV valuation and the option valuation calculations in Exhibit 1 and 3 aren’t straight forward comparable, since APV assumes financing the acquisition with new $300 million debt and real option valuation is calculated assuming total equity financing. If the tax rate remains constant, the real option valuation could be performed by taking the present value of the tax shields into account. In this case the values obtained by real option valuation would be even higher than the ones presented in the table.

Using the data provided in Exhibit 1, we can get free cash flow of year 2007-2011 would be $21.24 million, $26.73 million, $22.10 million, $25.47 million, and $29.54 million respectively. The computation is showed in Exhibit 1($ in thousands).

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.

1.a) To value Spyder Active Sports Inc., we decided to use the WACC method since we can easily value its cost of assets with the data immediately available to us in the case. We first unlevered the beta’s of 7 comparable companies and took the average to get a comparable unlevered beta for Spyder (Exhibit 1). Since we are assuming Spyder is entirely equity financed, its unlevered asset beta is equal to the beta of its assets. We now have a rough estimate of Spyder’s asset beta, we can

The previous 959.6m Amoco shares will convert into 633.336m shares of BP ADS equivalent, with the previous 965.6m ADS shares, BP shareholders will take part 60% of the new company, still have majority control over the firm. In this deal, we paid for about 20% premium, which is quite standard and normal. Because synergies from revenue and chemical divisions’ combination are not estimated nor not expected to bring benefit, the main synergy from the merge is 2 billion dollars saving of pretax operating cost. The value we create for our shareholders is $14,840.06 million (Amoco stand-alone value $46,430 million+ synergy $2 billion – price paid for Amoco $33,538.94). But this number is quite sensitive to a lot of factors, such as future energy demand, oil and gas price, industry growth potentials, ultimately affecting Amoco’s stand-alone and synergy valuation. Please