1. Given the proposed financing plan, describe your approach (qualitatively) to value AirThread. Should Ms. Zhang use WACC, APV or some combination thereof? Explain. (2 points) * 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. * In another word, it’s a highly levered transaction using a fixed WACC discount rate; however the leverage is changing in fact. * If we want to use WACC method, one assumption must be met: this program will not change the debt-equity ratio of AirThread. Under LBO approach, it’s
*…show more content…*

* Jennifer decided to use Bianco’s recommendation, a 5% equity market risk premium (=5%) * Interest rate had a 125bp spread over the current yield on 10-year US Treasury bonds (=4.25%). * By CAPM, we can get (8.3277%). We can calculate the each of different companies and get the average value. Or we can use CAPM once from average =0.8155. These two results are equivalent. * We already know the new is the interest rate of debt (5.5%). We use the average industry level (40.1%) as ATC’s D/E ratio like discussed in case page 7. By, we can get the new (9.46%). * By, we can calculate the new WACC is 7.7%.

Ms. Zhang should us the new WACC to the terminal value * She is considering the cash flow paid to all the equity or debt holders. So she cannot use the equity cost of capital.

3. Compute the unlevered free cash flow and the interest tax shields from 2008 to 2012 based on estimates provided in Exhibit 1 and Exhibit 6. (3 points)

Unlevered Free Cash Flow

Chart 2

Free cash flow is calculated as:

EBIT×1-t+Depreciation&Amortization Expense-Increase In NWC-Capital Expenditure * First, we calculate the Net Operating Profit after Tax, which is equals to EBIT×1-t. * Second, we use the working capital assumptions to calculate the net working capital:

The formulas are:

Account Receivable=Total Revenue×41.67360

Days Sales Equip. Rev. =Equipment×154.36360

Prepaid Expenses= (System Operating

Related

- Decent Essays
## Case - Statement of Cash Flow: Three Examples

- 1069 Words
- 5 Pages

Operating cash flow was not enough to cover capital investments (this firm does not to appear to pay dividends as it does not show in the prior 3 years). The firm is financing it operations from the issuance of common stock. $23,082 was raised during the period, which is covering its investments in capital expenditures.

- 1069 Words
- 5 Pages

Decent Essays - Decent Essays
## Star Appliances B

- 1181 Words
- 5 Pages

Given that the cost of equity is 9.4% and the cost of debt is 12.2%, Star’s cost of capital can be calculated as 9.14% (Appendix B). The company was also considering raising the cost of debt to the industry average of 19%. At this cost of debt, Star Company would have a lower cost of capital of 8.24% (Appendix B) because interest on debt capital is deductible whereas dividend payments on equity capital are not.

- 1181 Words
- 5 Pages

Decent Essays - Better Essays
## Optimum Capital Structure Of Costco Sale

- 1668 Words
- 7 Pages

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

- 1668 Words
- 7 Pages

Better Essays - Good Essays
## The Guillermo Furniture Store Scenario

- 1099 Words
- 5 Pages

The total cash flow for this alternative is $293,519.67, the WACC is 10.63%, and the NPV is $265,306.31. These three alternatives are able to earn returns greater than the cost of capital, what this means is value to investors because capital expenditures are finance via issuance of stock.

- 1099 Words
- 5 Pages

Good Essays - Satisfactory Essays
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.

- 657 Words
- 3 Pages

Satisfactory Essays - Better Essays
## Ust Case Study

- 2113 Words
- 9 Pages

We assume linear increase in the EBIT and EBITDA at 3% for 1999 from 1998 figures. Considering the debt will be long-term, we test both 10- and 20-year corporate yields as interest rates to see what would be the coverage ratios, using the 1999 projected figures.

- 2113 Words
- 9 Pages

Better Essays - Decent Essays
## Analyzing Financial Statements Essay examples

- 966 Words
- 4 Pages

Calculate the fixed cost, variable costs, and break-even point for the XYZ Corporation for the years 2003 and 2004 listed in Appendix D

- 966 Words
- 4 Pages

Decent Essays - Decent Essays
## Airtread Case Writeup

- 1298 Words
- 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

- 1298 Words
- 6 Pages

Decent Essays - Decent Essays
## Lab Exercise

- 1306 Words
- 6 Pages

Then, the present value of free cash flows can be calculated based on the discount rate (Appendix B). According to Appendix E, the market value of equity is $484,185 million and the stock price is $1,183.04, while its intrinsic value of stock is $1,440.81.

- 1306 Words
- 6 Pages

Decent Essays - Decent Essays
## Adjusted Present Value Essay

- 474 Words
- 2 Pages

The adjusted present value (APV) is defined as the net value of the project with the benefits from financing activities if the project is solely funded by equity. Therefore, it’s a useful tool to measure a project when the high debt level would be shifted to the company value if project is accepted. The flow to equity (FTE) approach is an alternative to adjusted present value which discounts the cash flow in the project that flow to the equity holders of a levered firm (Ross et.al. 2013, p.561). The major difference of unlevered and levered firm cash flow is the after tax interest payment. Finally, the weighted average cost of capital (WACC) approach considers the firm that is financed with both debt and equity and allocates the costs proportionally for each capital component. The cost of capital is

- 474 Words
- 2 Pages

Decent Essays - Better Essays
## Financial report analysis Essay

- 1997 Words
- 8 Pages

7. Net Cash Flow comparison to net income after tax. By taking net income and making

- 1997 Words
- 8 Pages

Better Essays - Better Essays
## Balance Sheet and Free Cash Flows

- 1155 Words
- 5 Pages

2. Forecast the firm’s financial statements for 2002 and 2003. What will be the external financing

- 1155 Words
- 5 Pages

Better Essays - Decent Essays
## f39a99a2c53a7bd16fdaa93ab31faf09 8c168b Essay examples

- 1628 Words
- 7 Pages

ABC Corp. will finance this expansion both with internal cash and by selling $10 million in bonds. The bonds pay interest of 10%. The expected return on ABC’s stock is 20% and firm is expected to maintain a debt-equity ratio of 1 for the foreseeable future. The corporate income tax rate is 20%. Ignoring the costs of financial distress and issue costs; calculate the net present value of this project using the Flow-To-Equity (FTE) approach.

- 1628 Words
- 7 Pages

Decent Essays - Satisfactory Essays
## Western Harbour Crossing

- 2654 Words
- 11 Pages

To answer question 1 we have decided to value the WHC asset using a CAPV methodology. The reasons behind choosing this approach have been the following: 1. The debt is changing over time as it matures and hence the capital structure changes making a WACC unsuitable for the valuation 2. We believe that this methodology captures in a more correct way the present value of the ITS emerging from the leverage

- 2654 Words
- 11 Pages

Satisfactory Essays