We can use a combination of APV and WACC approach to value AirThread Connections – using APV for 2008-2012, and using WACC to estimate the terminal value.
Use APV approach to value cash flows from 2008 to 2012
America Cable Company (ACC) should use APV approach to value cash flows from 2008 to 2012. This is because ACC uses classis LBO approach for acquisition where it purchases the target with significant amount of debt, and then in the long run paid the debt to bring down the leverage to industry norms. The goal is to use a tax efficient route and maximize the present value of tax shields, and minimize the amount of up-front equity invested in the deal.
Use WACC approach beyond 2008 to …show more content…
revenue based on equipment revenue, and prepaid expenses, accounts payable, total deferred revenue and total accrued liabilities based on total operating expense
Now Calculating the FCF from the above two: 2008 2009 2010 2011 2012
NOPAT (EBIT(1-t)) 243.54 277.56 334.56 387.12 434.64
Plus: Depreciation and Amortization 705.20 804.00 867.40 922.40 952.90
Less: Change in NWC 56.80 23.97 24.46 22.02 16.94
Less: Capex 631.27 719.65 867.44 970.09 1055.01
FCF (Unlevered) 260.67 337.93 310.06 317.42 315.59
PV of FCF(@r = 7.79%) 241.83 290.85 247.57 235.13 216.89
NPV of FCF (excluding terminal value) 1232.28
Next, we estimate the Terminal value of AirThread Connections Using WACC approach as leverage remains constant after 2012.
From Exhibit 7, the industry average of debt/value is 30.3% and debt/equity is 46.8%. We use them as estimate for long-term leverage as we expect AirThread Connections to maintain a leverage ratio as per industry standards.
Comparable Companies: Value Equity
Universal Mobile 48.0% 92.3%
Neuberger Wireless 29.3% 41.4%
Agile Connections 19.4% 24.1%
Big Country Communications 24.1% 31.7%