Following the development of the market both are facing challenges in order to compete in the market with its competitors, who are developing at a fast pace and are able to provide more range of services as compared to both AirThread and American Cables. Although, American Cables and AirThread are operating successfully with their current services, however, the range of services they are required to provide and compete well in the market are split between the two for which they are looking forward for acquisition and merger possibilities. In order to compete, the senior vice president of American Cable Communications, Robert Zimmerman, is looking forward for AirThread being a potential acquisition target. AirThread has been operating in wireless communication and has been a large cellular provider. On other hand, American Cable has been operating in sophisticated cable telephone services. Robert Zimmerman on idea of Elliot Bianco sees the future takeover of AirThread with three prospects, which he considers will help both the companies to enjoy shared benefits of operating successfully in the market as well as the synergic effects of the possible acquisition.
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This would help in the cost efficiency and network utilization. Furthermore, it would have the beneficial effect of reducing the risks associated with the operations of ACC. Unlevered Cost of Capital In order to compute the unlevered cost of capital, we have first generated the asset beta of all the comparable companies as shown in exhibit 7 of the case.
The average asset beta has been taken to compute the unlevered cost of capital for AirThread Connections, which is 0. Using the asset beta of 0. The range of WACC are shown in exhibit 2 but we will use the unlevered cost of capital of 8. Unlevered Free Cash Flows Next, we have calculated the forecasted unlevered free cash flows without any effect of debt and interest rate for the period of to as shown in exhibit 3.
Present Value of Cash Flows Using the unlevered cost of capital of 8. The interest and principle payments are shown in exhibit 4. The PV of tax shield has been calculated based on the cost of debt of 5. The PV of tax shield is The asset beta of 0. The equity beta is 1. The terminal growth rate has been calculated using the Logest function in excel based on the level of total assets historically. This rate is 1. Conclusion Based on the analysis performed in the steps above we have calculated the Enterprise Value of ATC by summing up the PV of the unlevered free cash flows, PV of the tax shield, PV of terminal value and the value of non operating assets.
This is just a sample partial case solution.
Airthread Connections Case (Work Sheet)
Valuation of AirThread Connections