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

* 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

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