Generally Accepted Accounting Principles and Capital Assumption Factor

657 Words Aug 19th, 2012 3 Pages
AirThread

Valuation of AirThread
This case deals with the valuation of AirThread Connections Business (ATC) from the perspective of its potential acquirer, American Cable Communication (ACC). ACC is a large cable operator which serves the video, internet and landline telephony needs of millions of users across America. However it is recently looking to acquire ATC which is one of the largest wireless companies in the United States. This acquisition will bring with it certain synergies that both can benefit from, which is primarily the reason behind the valuation requirements of AirThread.
Methodological approach to value AirThread
American Cable Communication is interested in raising significant capital following the Leveraged Buyout
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Using the other data provided in Exhibit 1 of the case study, we can calculate the Un-Levered Free Cash Flow for ATC during the period 2008-2012 as shown in the above table.
Discount rate calculation for AirThread
To calculate the discount rate for AirThread, we have looked at the industry Asset Beta (this measures the systematic business risk).

The Asset Beta for each firm is calculated using the formula βa= βe/1+(D/E)(1-t)
e.g. For Universal Mobile this value is computed as follows (we are using the tax rate as 40%)
0.86 / (1 + (0.923)(1-0.4) = 0.5534
The Industry average is simply the average of all the firms listed. Once we have the Asset Beta, we can calculate the Equity beta using the following formula βe = βa/ (1 – (D/V))

The highlighted row represents the average Debt/Value ratio for the industry as seen in the previous table. Therefore the Unlevered Cost of
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