Generally Accepted Accounting Principles and Non-operating Value

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Valuation of AirThread Connections

Group 7

(Shaojin Ding/ Jin Wang/ Wenqi Gu/
Shijia Wu/ Tongtong Yin/ Canran Xie)

Given the background of ACC and AirThread, do you think the acquisition is a good idea? Briefly explain your answer.
Yes. First, American Cable Communication (ACC) and AirThread could help each other compete in the industry that was moving more and more bundled service offerings. Second, the acquisition could help both companies expand into the business market. Third, ACC was in a unique position to add value to AirThread’s operations because the acquisition could save AirThread more than 20% in backhaul costs. The reasons above make us believe that the synergy is positive and the acquisition is
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The debt payment schedule is presented in Ex 6.) 
Remember that different valuation models are not mutually exclusive, you can use different model for different forecasting periods.
We still divide the value of AirThread as a merger target into operating part and non-operating part.
First, we combine the DCF model with APV model to calculate the operating value.
Because during 2008 to 2012, AirThread need to pay down acquisition debt, the D/E ratio is variable. So we have to choose the APV model (= NPV + NPVF). But after 2012, the acquisition debt has paid off, so the D/E ratio is constant, which suggests using DCF model.
First, we calculate the operating value during 2008 and 2012 using APV. The cash flows of these five years combine the stand-alone cash flows and the synergy cash flows. We assume depreciation/capital expenditure equals 1. First of all, we calculate the NPV. The potential synergies come from system operating cost saving as well as the increase in revenue and gross profit. We use the unlevered (=0.96) and get the cost of equity (=10.2%). We get the synergies cash flow using Jenifer’s projection about synergies. We use the cost of equity (=10.2%) to discount the cash flows and get NPV from 2008 and 2012, which is $1,511.39m. (Exhibit 5)
In this case, NPVF is Tax Subsidy. We discount the interests of the 5 years to 2007 using cost of debt (=5.50%), and then
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